UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
|
Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
|
For the Quarterly Period Ended March 31, 2009
Commission File Number
0-16421
PROVIDENT BANKSHARES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
|
|
|
Maryland
|
|
52-1518642
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification Number)
|
114 East Lexington Street, Baltimore, Maryland 21202
(Address of Principal Executive Offices)
(410) 277-7000
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
¨
No
¨
Indicate by check mark whether
the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer
¨
|
|
Accelerated filer
x
|
|
Non-accelerated filer
¨
|
|
Smaller reporting company
¨
|
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
¨
No
x
At May 1, 2009, the Registrant had 34,148,453 shares of $1.00 par value common stock outstanding.
TABLE OF CONTENTS
2
Forward-looking Statements
This report, as well as other written communications made from time to time by Provident Bankshares Corporation and its subsidiaries (the Corporation) and oral communications made from time to time by authorized officers of the
Corporation, may contain statements relating to the future results of the Corporation (including certain projections and business trends) that are considered forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995 (the PSLRA). Such forward-looking statements may be identified by the use of such words as believe, expect, anticipate, should, planned,
estimated, intend and potential. Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and
results of operations and business of the Corporation, including earnings growth determined using U.S. generally accepted accounting principles (GAAP); revenue growth in retail banking, lending and other areas; origination volume in the
Corporations consumer, commercial and other lending businesses; asset quality and levels of non-performing assets; impairment charges with respect to investment securities; current and future capital management programs; non-interest income
levels, including fees from services and product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. For these statements, the Corporation claims the protection of the safe harbor for
forward-looking statements contained in the PSLRA.
The Corporation cautions you that a number of important factors could cause actual results to differ
materially from those currently anticipated in any forward-looking statement. Such factors include, but are not limited to: the factors identified in the Corporations Form 10-K for the fiscal year ended December 31, 2008 under the
headings Forward-Looking Statements and Item 1A. Risk Factors, the Corporations pending merger with M&T Bank Corporation, the business uncertainties and contractual restrictions to which the Corporation is subject
while the merger is pending, the limitations and restrictions imposed through the Corporations participation in the Troubled Asset Relief Program, prevailing economic conditions, either nationally or locally in some or all areas in which the
Corporation conducts business or conditions in the securities markets or the banking industry; changes in interest rates, deposit flows, loan demand, real estate values and competition, which can materially affect, among other things, consumer
banking revenues, revenues from sales on non-deposit investment products, origination levels in the Corporations lending businesses and the level of defaults, losses and prepayments on loans made by the Corporation, whether held in portfolio
or sold in the secondary markets; changes in the quality or composition of the loan or investment portfolios; the Corporations ability to successfully integrate any assets, liabilities, customers, systems and management personnel the
Corporation may acquire into its operations and its ability to realize related revenue synergies and cost savings within expected time frames; the Corporations timely development of new and competitive products or services in a changing
environment, and the acceptance of such products or services by customers; operational issues and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems, on which it is highly dependent;
changes in accounting principles, policies, and guidelines; changes in any applicable law, rule, regulation or practice with respect to tax or legal issues; risks and uncertainties related to mergers and related integration and restructuring
activities; conditions in the securities markets or the banking industry; changes in the quality or composition of the investment portfolio; litigation liabilities, including costs, expenses, settlements and judgments; or the outcome of other
matters before regulatory agencies, whether pending or commencing in the future; and other economic, competitive, governmental, regulatory and technological factors affecting the Corporations operations, pricing, products and services.
Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond the Corporations control. Readers are cautioned not to place undue reliance on these forward-looking statements which are made as of the
date of this report, and, except as may be required by applicable law or regulation, the Corporation assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the
forward-looking statements.
3
PART I FINANCIAL INFORMATION
Item 1.
|
Financial Statements
|
Provident Bankshares Corporation and Subsidiaries
Condensed Consolidated Statements of
Condition Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share and share amounts)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
March 31,
2008
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
126,472
|
|
|
$
|
117,345
|
|
|
$
|
125,731
|
|
Short-term investments
|
|
|
765
|
|
|
|
1,096
|
|
|
|
2,011
|
|
Mortgage loans held for sale
|
|
|
21,107
|
|
|
|
1,728
|
|
|
|
15,541
|
|
Securities available for sale
|
|
|
1,021,251
|
|
|
|
1,077,299
|
|
|
|
1,366,779
|
|
Securities held to maturity
|
|
|
246,540
|
|
|
|
297,043
|
|
|
|
47,146
|
|
Loans
|
|
|
4,312,479
|
|
|
|
4,356,798
|
|
|
|
4,202,677
|
|
Less allowance for loan losses
|
|
|
95,252
|
|
|
|
73,098
|
|
|
|
55,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
4,217,227
|
|
|
|
4,283,700
|
|
|
|
4,147,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
63,234
|
|
|
|
62,923
|
|
|
|
59,523
|
|
Accrued interest receivable
|
|
|
22,807
|
|
|
|
25,666
|
|
|
|
29,753
|
|
Goodwill
|
|
|
255,330
|
|
|
|
255,330
|
|
|
|
253,906
|
|
Intangible assets
|
|
|
5,020
|
|
|
|
4,886
|
|
|
|
5,836
|
|
Other assets
|
|
|
471,801
|
|
|
|
432,832
|
|
|
|
350,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,451,554
|
|
|
$
|
6,559,848
|
|
|
$
|
6,403,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
702,959
|
|
|
$
|
652,816
|
|
|
$
|
686,289
|
|
Interest-bearing
|
|
|
4,117,365
|
|
|
|
4,099,888
|
|
|
|
3,684,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
4,820,324
|
|
|
|
4,752,704
|
|
|
|
4,370,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
314,378
|
|
|
|
380,788
|
|
|
|
684,946
|
|
Long-term debt
|
|
|
654,431
|
|
|
|
679,409
|
|
|
|
771,640
|
|
Accrued expenses and other liabilities
|
|
|
53,328
|
|
|
|
75,874
|
|
|
|
59,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,842,461
|
|
|
|
5,888,775
|
|
|
|
5,886,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock (par value $1,000) authorized 5,000,000 shares; issued 194,000 and 200,900 shares at March 31, 2009, and
December 31, 2008, respectively; liquidation preference $1,000 per share
|
|
|
181,608
|
|
|
|
187,946
|
|
|
|
|
|
Common stock (par value $1.00) authorized 100,000,000 shares; issued 34,167,857, 33,510,889 and 31,737,501 shares at March 31,
2009, December 31, 2008, and March 31, 2008, respectively
|
|
|
34,168
|
|
|
|
33,511
|
|
|
|
31,738
|
|
Additional paid-in capital
|
|
|
382,720
|
|
|
|
376,234
|
|
|
|
347,992
|
|
Retained earnings
|
|
|
102,987
|
|
|
|
178,027
|
|
|
|
216,700
|
|
Net accumulated other comprehensive loss
|
|
|
(92,390
|
)
|
|
|
(104,645
|
)
|
|
|
(78,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
609,093
|
|
|
|
671,073
|
|
|
|
517,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
6,451,554
|
|
|
$
|
6,559,848
|
|
|
$
|
6,403,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
4
Provident Bankshares Corporation and Subsidiaries
Condensed Consolidated Statements of OperationsUnaudited
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(dollars in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
48,243
|
|
|
$
|
66,369
|
|
Investment securities
|
|
|
16,022
|
|
|
|
19,731
|
|
Tax-advantaged loans and securities
|
|
|
1,571
|
|
|
|
1,639
|
|
Short-term investments
|
|
|
4
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
65,840
|
|
|
|
87,775
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
25,571
|
|
|
|
28,210
|
|
Short-term borrowings
|
|
|
750
|
|
|
|
6,089
|
|
Long-term debt
|
|
|
4,539
|
|
|
|
8,487
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
30,860
|
|
|
|
42,786
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
34,980
|
|
|
|
44,989
|
|
Less provision for loan losses
|
|
|
35,610
|
|
|
|
3,114
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan losses
|
|
|
(630
|
)
|
|
|
41,875
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Income (Loss):
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
17,715
|
|
|
|
21,031
|
|
Commissions and fees
|
|
|
904
|
|
|
|
1,562
|
|
Impairment on investment securities
|
|
|
(87,416
|
)
|
|
|
(42,655
|
)
|
Net gains (losses)
|
|
|
430
|
|
|
|
(191
|
)
|
Net derivative activities
|
|
|
680
|
|
|
|
39
|
|
Other non-interest income
|
|
|
4,641
|
|
|
|
5,090
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income (loss)
|
|
|
(63,046
|
)
|
|
|
(15,124
|
)
|
|
|
|
|
|
|
|
|
|
Non-Interest Expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
27,863
|
|
|
|
26,682
|
|
Occupancy expense, net
|
|
|
6,150
|
|
|
|
5,972
|
|
Furniture and equipment expense
|
|
|
4,228
|
|
|
|
3,753
|
|
External processing fees
|
|
|
5,272
|
|
|
|
5,248
|
|
Merger expense
|
|
|
792
|
|
|
|
|
|
Restructuring activities
|
|
|
|
|
|
|
74
|
|
Other non-interest expense
|
|
|
13,019
|
|
|
|
9,702
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
57,324
|
|
|
|
51,431
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(121,000
|
)
|
|
|
(24,680
|
)
|
Income tax benefit
|
|
|
(53,784
|
)
|
|
|
(7,058
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(67,216
|
)
|
|
$
|
(17,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(67,216
|
)
|
|
$
|
(17,622
|
)
|
Preferred stock dividend and amortization of preferred stock discount
|
|
|
3,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(70,907
|
)
|
|
$
|
(17,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share Amounts:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.12
|
)
|
|
$
|
(0.56
|
)
|
Diluted
|
|
|
(2.12
|
)
|
|
|
(0.56
|
)
|
The accompanying notes are an integral part of these statements.
5
Provident Bankshares Corporation and Subsidiaries
Condensed Consolidated Statements of Cash FlowsUnaudited
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(67,216
|
)
|
|
$
|
(17,622
|
)
|
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,427
|
|
|
|
4,167
|
|
Provision for loan losses
|
|
|
35,610
|
|
|
|
3,114
|
|
Provision for deferred income tax benefit
|
|
|
(46,538
|
)
|
|
|
(12,354
|
)
|
Impairment on investment securities
|
|
|
87,416
|
|
|
|
42,655
|
|
Net (gains) losses
|
|
|
(430
|
)
|
|
|
191
|
|
Net derivative activities
|
|
|
(680
|
)
|
|
|
(39
|
)
|
Originated loans held for sale
|
|
|
(38,297
|
)
|
|
|
(28,498
|
)
|
Proceeds from sales of loans held for sale
|
|
|
18,983
|
|
|
|
21,928
|
|
Merger related activities
|
|
|
792
|
|
|
|
|
|
Share based payments
|
|
|
839
|
|
|
|
534
|
|
Preferred dividends declared and unpaid
|
|
|
21
|
|
|
|
|
|
Net increase in accrued interest receivable and other assets
|
|
|
1,205
|
|
|
|
9,650
|
|
Net decrease in accrued expenses and other liabilities
|
|
|
(23,124
|
)
|
|
|
(796
|
)
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
40,224
|
|
|
|
40,552
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by operating activities
|
|
|
(26,992
|
)
|
|
|
22,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Principal collections and maturities of securities available for sale
|
|
|
40,299
|
|
|
|
28,831
|
|
Principal collections and maturities of securities held to maturity
|
|
|
119
|
|
|
|
|
|
Proceeds from sales of securities available for sale
|
|
|
249
|
|
|
|
|
|
Purchases of securities available for sale
|
|
|
|
|
|
|
(40,589
|
)
|
Loan originations and purchases less principal collections
|
|
|
30,693
|
|
|
|
10,131
|
|
Purchases of premises and equipment
|
|
|
(3,986
|
)
|
|
|
(2,817
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
67,374
|
|
|
|
(4,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
67,248
|
|
|
|
153,960
|
|
Net decrease in short-term borrowings
|
|
|
(66,410
|
)
|
|
|
(176,449
|
)
|
Proceeds from long-term debt
|
|
|
|
|
|
|
25,000
|
|
Payments and maturities of long-term debt
|
|
|
(25,000
|
)
|
|
|
(25,266
|
)
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
127
|
|
Tax expense associated with share based payments
|
|
|
(596
|
)
|
|
|
(156
|
)
|
Cash dividends paid on common stock
|
|
|
(3,679
|
)
|
|
|
(10,278
|
)
|
Cash dividends paid on preferred stock
|
|
|
(3,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(31,586
|
)
|
|
|
(33,062
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
8,796
|
|
|
|
(14,576
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
118,441
|
|
|
|
142,318
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
127,237
|
|
|
$
|
127,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
Interest paid, net of amount credited to deposit accounts
|
|
$
|
22,087
|
|
|
$
|
26,165
|
|
Income taxes paid
|
|
|
43
|
|
|
|
231
|
|
Premium paid on deposits purchased
|
|
|
509
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
6
Provident Bankshares Corporation and Subsidiaries
Notes to Condensed Consolidated Financial StatementsUnaudited
March 31, 2009
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Provident Bankshares Corporation (the Corporation), a Maryland corporation, is the bank holding company for Provident Bank (the Bank), a Maryland
chartered stock commercial bank. The Bank serves individuals and businesses through a network of banking offices and ATMs in Maryland, Virginia, and southern York County, Pennsylvania. Related financial services are offered through its wholly owned
subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident Investment Company and leases through Court Square Leasing.
The accounting and reporting policies of the Corporation conform with U.S. generally accepted accounting principles (GAAP) and prevailing practices within the banking industry for interim financial
information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. The following summary of significant
accounting policies of the Corporation is presented to assist the reader in understanding the financial and other data presented in this report. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the
results that may be expected for any future quarters or for the year ending December 31, 2009. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Corporations Annual Report on Form
10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission (SEC) on March 13, 2009.
Principles of Consolidation and Basis of Presentation
The unaudited Condensed Consolidated Financial Statements include the accounts of the
Corporation and its wholly owned subsidiary, Provident Bank and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. These unaudited Condensed Consolidated Financial Statements are prepared
in accordance with GAAP and reflect all adjustments that are, in the opinion of management, necessary to a fair statement of our results for the interim periods presented. All such adjustments are of a normal recurring nature.
Use of Estimates
The preparation of these financial statements
requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities for the reporting periods. Management evaluates estimates
on an on-going basis and believes the following represent its more significant judgments and estimates used in preparation of its consolidated financial statements: allowance for loan losses, non-accrual loans, other real estate owned, estimates of
fair value and intangible assets associated with mergers, other-than-temporary impairment of investment securities, pension and post-retirement benefits, asset prepayment rates, goodwill and intangible assets, share-based payment, derivative
financial instruments, litigation and income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Each estimate and its financial impact, to the extent significant to financial results, is discussed in the audited Consolidated
Financial Statements or in the notes to the audited Consolidated Financial Statements as included in the Corporations Annual Report on Form 10-K for the year ended December 31, 2008. It is at least reasonably possible that each of the
Corporations estimates could change in the near term or that actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could be material to the Corporations unaudited Condensed
Consolidated Financial Statements.
Other Changes in Accounting Principles
In June 2008, the Financial Accounting Standards Board (FASB) issued FASB staff position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities (FSP EITF 03-6-1), which will be effective for fiscal years and interim periods beginning after December 15, 2008, with early adoption prohibited. This FSP requires unvested share-based payments to
entitled employees that receive nonrefundable dividends to be considered participating securities. The Corporation has determined that the amounts are immaterial with respect to the calculation of earnings per share.
7
In June 2008, the FASB issued EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entitys Own Stock (EITF 07-5), which is effective for fiscal years beginning after December 15, 2008. This EITF addresses whether provisions in financial instruments that introduce adjustment features, such as contingent
adjustments, would prevent treating a derivative contract or an embedded derivative on a companys own stock as indexed solely to the companys stock. The Corporation has determined that this guidance does not impact the financial
statements of the Corporation.
In April 2009, the FASB issued FSP FAS 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments (FSP FAS 115-2 and 124-2), which will be effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. This FSP changes the
requirements for recognizing OTTI for debt securities and modifies the criteria used to assess the collectability of cash flows when determining the potential for OTTI. The FSP further modifies the presentation of OTTI losses and increases the
frequency of and expands existing disclosure requirements. The Corporation has not elected to early adopt this guidance and is currently evaluating the implication and impact of this guidance. As it relates to the structured investments portion of
its investment securities portfolio, the Corporation estimated the effect of this standard as of March 31, 2009, would reduce cumulative impairments recognized by approximately $120 million. Total stockholders equity would be unchanged. For
the remainder of the investment securities portfolio, the Corporation estimated the effect of this standard to be immaterial to the Corporations financial statements.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly (FSP FAS 157-4), which will be effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. This FSP provides additional
guidance related to the use of judgment in evaluating the relevance of inputs when determining fair value, estimating fair values when the volume and level of activity for an asset or liability has significantly decreased and identifying
transactions that are not orderly. The Corporation has not elected to early adopt this guidance and is currently evaluating the implications and impact of this guidance.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1), which will have an effective date for interim periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. This FSP requires disclosures about the fair value of its financial instruments whenever it issues summarized financial information for
interim reporting periods. The Corporation has not elected to early adopt the guidance and is currently evaluating the implications and impact of this guidance.
NOTE 2FAIR VALUE MEASUREMENTS
Effective January 1, 2008, the Corporation adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (SFAS No. 157). This statement defines the concept of fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS
No. 157 applies only to fair value measurements required or permitted under current accounting pronouncements, but does not require any new fair value measurements.
Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. Market participants are assumed to be parties to
a transaction that are both able and willing to enter into a transaction and are assumed to be sufficiently knowledgeable about the value and inherent risks associated with the asset or liability. FSP FAS 157-3 clarified the application of SFAS
No. 157 if the market is not active. If there is limited market activity for an asset at the measurement date, the fair value is the price that would be received by the holder of the financial asset in an orderly transaction that is not a
forced sale, liquidation sale or a distressed sale at the measurement date. SFAS No. 157 establishes a framework for measuring fair value that considers the attributes specific to particular assets or liabilities and establishes a three-level
hierarchy for determining fair value based on the transparency of inputs to each valuation as of the fair value measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the
use of large position discounts for financial instruments quoted in active markets. The disclosures emphasis is on the inputs used to measure fair value and the effect on the measurement on earnings for the period. The adoption of SFAS
No. 157 did not have any effect on the Corporations financial condition or results of operations.
Fair Value Process
The Corporation has established a well documented process for determining fair value. Fair value may be based on quoted market prices in an active market when
available, or through inputs obtained from a third party pricing service and internally validated for reasonableness prior to being used in the Condensed Consolidated Financial Statements. Formal discussions with the pricing service vendors are
conducted as part of the due diligence process in order to maintain a current understanding of the models and related assumptions and inputs that these vendors use in developing prices. If it is determined that a price provided is outside
established parameters, further examination of the price, including follow-up discussions with the pricing service or dealer will occur. If it is determined that the price lacks validity, that price will not be used. If listed prices or active
market quotes are not readily available, fair value may be based on external fair value models that use market participant data, independently sourced market observable data or unobserved inputs that are corroborated by market data. Fair value
models may be required when trading activity has declined significantly, prices are not current or pricing variations are significant. Data that is considered includes, but is not limited to, discount rates, interest rate yield curves, prepayment
rates, delinquencies, bond ratings, credit risk,
8
loss severities, recovery timing, default and cumulative loss expectations that are implied by market prices for similar securities and collateral structure
types, and expected cash flow assumptions. In addition, valuation adjustments may be made in the determination of fair value. These fair value adjustments may include, but are not limited to, amounts to reflect counterparty credit quality,
creditworthiness, liquidity and other unobservable inputs that are applied consistently over time. These adjustments are estimates, and therefore, subject to managements judgment. When relevant observable inputs are not available, fair value
models may use input assumptions from a market participants perspective that generate a series of cash flows that are discounted at an appropriate risk adjusted discount rate. The Corporation has various controls in place to ensure that the
fair value measurements are appropriate and reliable, that they are based on observable inputs wherever possible and that valuation approaches are consistently applied and the assumptions used are reasonable. This includes a review and approval of
the valuation methodologies and pricing models, benchmarking, comparison to similar products and/or review of actual cash settlements.
The
Corporations valuation methodologies are continually refined as markets and products develop and the pricing for certain products becomes more or less transparent. While the Corporation believes its valuation methods are appropriate and
consistent with those of other market participants, the use of different methods or assumptions to determine fair values could result in a materially different estimate of the fair value of some financial instruments.
Hierarchy Levels
SFAS No. 157 establishes a three-level
valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based on the inputs used to value the particular asset or liability at the measurement date. The three levels are defined as follows:
|
|
|
Level 1 quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar
assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
|
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
Each financial instruments level assignment within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement for that particular instrument.
The following is a description of the valuation methodologies used for instruments measured at fair value, as
well as the general classification of each instrument under the valuation hierarchy.
Assets and Liabilities
Mortgage loans held for sale
Mortgage loans held for sale are
valued based on the unobservable contractual terms established with a third party purchaser who processes and purchases the loans at their face amount and are classified as Level 3.
Investment securities
Securities are classified as Level 1 within the valuation hierarchy when quoted prices
are available in an active market. This includes securities, such as U.S. Treasuries, whose value is based on quoted market prices in active markets for identical assets.
Securities are generally classified as Level 2 within the valuation hierarchy when fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows
and include certain U.S. agency backed mortgage products, certain asset-backed securities and municipal debt obligations. If quoted market prices in active markets for identical assets are not available, fair values are estimated by using quoted
market prices in active markets of securities with similar characteristics adjusted for observable market information.
Securities are classified as Level
3 within the valuation hierarchy in certain cases when there is limited activity or less transparency to the valuation inputs. These securities include certain asset-backed securities, non-agency mortgage-backed securities (MBS) and
pooled trust preferred securities. In the absence of observable or corroborated market data, internally developed estimates that incorporate market-based assumptions are used when such information is available.
Beginning in the third quarter of 2008, the Corporation no longer included FHLB stock in the SFAS No. 157 disclosure due to FHLB stock being recorded at cost. Also,
beginning in the third quarter of 2008, the Corporation began categorizing U.S. agency-backed mortgage securities as Level 2 within the valuation hierarchy because it was concluded that the fair values for these securities were based on Level 2
inputs.
9
Fair value of investment securities is based on quoted active market prices, when available. If listed prices or active
market quotes are not available, fair value may be based on fair value models that use market observable or independently sourced market input data. Fair value models may be required when trading activity has declined significantly or does not
exist, prices are not current or pricing variations are significant. The Corporation uses inputs provided by an independent third party pricing service in establishing the fair value measurement for this security type and the prices are non-binding.
Management validates the inputs received in determining fair value. The securities are priced using a market pricing approach, which combines the use of an independent third party pricing services proprietary pricing models with inputs such as
spreads to benchmarks, prepayment speeds, loss, and recovery and default rates that are implied by market prices for similar securities and collateral structure types.
Derivatives
The Corporations open derivative positions are classified as Level 2 within the valuation
hierarchy. Open derivative positions are valued using a third party developed model that uses as its basis observable market data or inputs provided by the third party and validated by management. Examples of these derivatives include interest rate
swaps, caps and floors where the indices, correlation and contractual rates may be observable. Exchange-traded derivatives, if applicable, are valued using quoted prices and classified within Level 1 of the valuation hierarchy. At March 31,
2009 and 2008, respectively, the Corporation did not have any exchange-traded derivatives.
The derivative financial instruments valued at fair value at
March 31, 2009 incorporate a credit valuation adjustment in the valuation of the financial instrument. An analysis of each counterparty was performed to determine what, if any, adjustment should be made to the derivative valuations. For each
counterparty, the analysis considered: the value of all derivative contracts, the amount of collateral posted, the terms of collateral agreements, size and nature of the derivative position, potential future movements in market rates and derivative
values, counterparty credit worthiness, probability of default and consideration of loss severity.
Bank owned life insurance policies
Beginning in the third quarter of 2008, the Corporation no longer includes bank owned life insurance policies in the SFAS No. 157 disclosure because values of these
policies are based on cash surrender values provided by the insurance carriers.
Financial Instruments at Fair Value Summary
The following table presents the financial instruments measured at fair value on a recurring basis as of March 31, 2009 and 2008 on the Condensed Consolidated
Statements of Condition utilizing the SFAS No. 157 hierarchy discussed on the previous pages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009
|
(in thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Mortgage loans held for sale
|
|
$
|
21,107
|
|
$
|
|
|
$
|
|
|
$
|
21,107
|
|
|
|
|
|
U.S. Treasury
|
|
|
12,994
|
|
|
12,994
|
|
|
|
|
|
|
GNMA, FNMA and FHLMC mortgage-backed securities
|
|
|
654,736
|
|
|
|
|
|
654,736
|
|
|
|
Non-agency mortgage-backed securities
|
|
|
49,524
|
|
|
|
|
|
|
|
|
49,524
|
Municipal securities
|
|
|
153,582
|
|
|
|
|
|
153,582
|
|
|
|
Asset-backed securities
|
|
|
112,301
|
|
|
|
|
|
35,120
|
|
|
77,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
983,137
|
|
|
12,994
|
|
|
843,438
|
|
|
126,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
21,565
|
|
|
|
|
|
21,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
1,025,809
|
|
$
|
12,994
|
|
$
|
865,003
|
|
$
|
147,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
1,232
|
|
$
|
|
|
$
|
1,232
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
1,232
|
|
$
|
|
|
$
|
1,232
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
(in thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Mortgage loans held for sale
|
|
$
|
1,728
|
|
$
|
|
|
$
|
|
|
$
|
1,728
|
|
|
|
|
|
U.S. Treasury
|
|
|
16,992
|
|
|
16,992
|
|
|
|
|
|
|
GNMA, FNMA and FHLMC mortgage-backed securities
|
|
|
682,293
|
|
|
|
|
|
682,293
|
|
|
|
Non-agency mortgage-backed securities
|
|
|
54,995
|
|
|
|
|
|
|
|
|
54,995
|
Municipals
|
|
|
152,784
|
|
|
|
|
|
152,784
|
|
|
|
Asset-backed securities
|
|
|
132,316
|
|
|
|
|
|
44,715
|
|
|
87,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
1,039,380
|
|
|
16,992
|
|
|
879,792
|
|
|
142,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
22,112
|
|
|
|
|
|
22,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
1,063,220
|
|
$
|
16,992
|
|
$
|
901,904
|
|
$
|
144,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
1,288
|
|
$
|
|
|
$
|
1,288
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
1,288
|
|
$
|
|
|
$
|
1,288
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
The following table provides a reconciliation of all assets and liabilities measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the quarters ended March 31, 2009 and 2008. Level 3 financial instruments typically include unobservable components, but may also include some observable components that may be validated to
external sources.
|
|
|
|
|
|
|
|
|
|
Level 3 measurements
for the three months ended
March 31, 2009
|
|
(in thousands)
|
|
Mortgage
loans held
for sale
|
|
Securities
available
for sale
|
|
Balance at December 31, 2008
|
|
$
|
1,728
|
|
$
|
142,596
|
|
Total net gains (losses) for the year included in:
|
|
|
|
|
|
|
|
Net gains (losses)
|
|
|
65
|
|
|
(18,118
|
)
|
Other comprehensive gain (loss)
|
|
|
|
|
|
4,897
|
|
Purchases, sales or settlements, net
|
|
|
19,314
|
|
|
(2,670
|
)
|
Net transfer in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
21,107
|
|
$
|
126,705
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) included in net income for the year to date relating to assets and liabilities held at March 31,
2009
|
|
$
|
|
|
$
|
(18,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 measurements
for the three months
ended
March 31, 2008
|
(in thousands)
|
|
Mortgage
loans
held for
sale
|
|
Securities
available
for sale
|
|
|
Bank
owned life
insurance
|
Balance at December 31, 2007
|
|
$
|
8,859
|
|
$
|
519,278
|
|
|
$
|
153,355
|
Total net gains (losses) for the year included in:
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses)
|
|
|
112
|
|
|
(19,439
|
)
|
|
|
1,435
|
Other comprehensive gain (loss)
|
|
|
|
|
|
(27,678
|
)
|
|
|
|
Purchases, sales or settlements, net
|
|
|
6,570
|
|
|
(1,809
|
)
|
|
|
|
Net transfer in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
$
|
15,541
|
|
$
|
470,352
|
|
|
$
|
154,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) included in net income for the year to date relating to assets and liabilities held at March 31,
2008
|
|
$
|
|
|
$
|
(19,439
|
)
|
|
$
|
1,435
|
|
|
|
|
|
|
|
|
|
|
|
11
Assets and liabilities measured at fair value on a recurring basis
The following table provides gains and losses (realized and unrealized) included in the Condensed Consolidated Statements of Operations for the three months ended
March 31, 2009 and 2008 for Level 3 and for assets measured in the Condensed Consolidated Statements of Condition at fair value on a recurring basis that are still held at March 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value
for the Three Months
Ended
March 31, 2009
|
(in thousands)
|
|
Net losses
|
|
|
Other
non-interest
income
|
|
Total changes
in fair values
included in
current period
earnings
|
|
|
Total changes
in fair
values
included in unrealized
gains or losses for
assets still held
|
Mortgage loans held for sale
|
|
$
|
|
|
|
$
|
65
|
|
$
|
65
|
|
|
$
|
|
Securities
|
|
|
(18,118
|
)
|
|
|
|
|
|
(18,118
|
)
|
|
|
4,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
(18,118
|
)
|
|
$
|
65
|
|
$
|
(18,053
|
)
|
|
$
|
4,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value
for the Three Months
Ended
March 31, 2008
|
|
(in thousands)
|
|
Net losses
|
|
|
Other
non-interest
income
|
|
Total changes in
fair values
included in current
period earnings
|
|
Mortgage loans held for sale
|
|
$
|
|
|
|
$
|
112
|
|
$
|
112
|
|
Securities
|
|
|
(19,439
|
)
|
|
|
|
|
|
(19,439
|
)
|
Bank owned life insurance
|
|
|
|
|
|
|
1,435
|
|
|
1,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
(19,439
|
)
|
|
$
|
1,547
|
|
$
|
(17,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value changes
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These instruments are not measured at fair value on an ongoing basis but are subject to fair value in certain circumstances, such as
when there is evidence of impairment that may require write-downs. The write-downs for the Corporations more significant assets or liabilities measured on a non-recurring basis are based on the lower of amortized cost or estimated fair value.
Securities Held to Maturity
A review of the
investment portfolio may indicate that certain securities held to maturity are impaired. If necessary, the Corporation performs fair value modeling and evaluations on these securities. All processes and controls associated with determination of the
fair value of those securities are consistent with these performed for securities available for sale. Impaired securities include bank pooled trust preferred securities that are classified as Level 3 within the valuation hierarchy.
Impaired Loans
Impaired loans are classified as Level 2
within the valuation hierarchy. The Corporation considers loans to be impaired when it becomes probable that the Corporation will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. All non-accrual
loans are considered impaired. The measurement of impaired loans is based on the fair value of the underlying collateral.
12
The table below reflects securities held to maturity with realized losses due to OTTI and impaired loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009
|
|
|
(in thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Losses
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
$
|
32,068
|
|
$
|
|
|
$
|
|
|
$
|
32,068
|
|
$
|
69,298
|
Loans
|
|
|
112,269
|
|
|
|
|
|
112,269
|
|
|
|
|
|
14,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
144,337
|
|
$
|
|
|
$
|
112,269
|
|
$
|
32,068
|
|
$
|
83,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008
|
|
|
(in thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Losses
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Loans
|
|
|
30,621
|
|
|
|
|
|
30,621
|
|
|
|
|
|
6,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,621
|
|
$
|
|
|
$
|
30,621
|
|
$
|
|
|
$
|
6,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
NOTE 3INVESTMENT SECURITIES
The following table presents the aggregate amortized cost and fair values of the investment securities portfolio as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies and corporations
|
|
$
|
51,091
|
|
$
|
17
|
|
$
|
|
|
$
|
51,108
|
Mortgage-backed securities
|
|
|
690,003
|
|
|
17,066
|
|
|
2,809
|
|
|
704,260
|
Municipal securities
|
|
|
150,146
|
|
|
3,676
|
|
|
240
|
|
|
153,582
|
Asset-backed securities
|
|
|
212,277
|
|
|
1,335
|
|
|
101,311
|
|
|
112,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
1,103,517
|
|
|
22,094
|
|
|
104,360
|
|
|
1,021,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt securities
|
|
|
246,540
|
|
|
258
|
|
|
113,478
|
|
|
133,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity
|
|
|
246,540
|
|
|
258
|
|
|
113,478
|
|
|
133,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
1,350,057
|
|
$
|
22,352
|
|
$
|
217,838
|
|
$
|
1,154,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies and corporations
|
|
$
|
54,855
|
|
$
|
56
|
|
$
|
|
|
$
|
54,911
|
Mortgage-backed securities
|
|
|
742,281
|
|
|
11,612
|
|
|
16,605
|
|
|
737,288
|
Municipal securities
|
|
|
150,877
|
|
|
2,226
|
|
|
319
|
|
|
152,784
|
Asset-backed securities
|
|
|
214,275
|
|
|
1,443
|
|
|
83,402
|
|
|
132,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
1,162,288
|
|
|
15,337
|
|
|
100,326
|
|
|
1,077,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt securities
|
|
|
297,043
|
|
|
513
|
|
|
115,104
|
|
|
182,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity
|
|
|
297,043
|
|
|
513
|
|
|
115,104
|
|
|
182,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
1,459,331
|
|
$
|
15,850
|
|
$
|
215,430
|
|
$
|
1,259,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies and corporations
|
|
$
|
45,592
|
|
$
|
41
|
|
$
|
|
|
$
|
45,633
|
Mortgage-backed securities
|
|
|
712,184
|
|
|
3,247
|
|
|
18,584
|
|
|
696,847
|
Municipal securities
|
|
|
151,650
|
|
|
2,505
|
|
|
209
|
|
|
153,946
|
Asset-backed securities
|
|
|
580,695
|
|
|
143
|
|
|
110,485
|
|
|
470,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
1,490,121
|
|
|
5,936
|
|
|
129,278
|
|
|
1,366,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt securities
|
|
|
47,146
|
|
|
714
|
|
|
2,538
|
|
|
45,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity
|
|
|
47,146
|
|
|
714
|
|
|
2,538
|
|
|
45,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
1,537,267
|
|
$
|
6,650
|
|
$
|
131,816
|
|
$
|
1,412,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The U.S. Treasury and government agencies and corporations amounts in the table above include FHLB Atlanta stock, at
cost, of $38.1 million, $37.9 million and $43.1 million at March 31, 2009, December 31, 2008 and March 31, 2008, respectively. There have been no events that would result in a significant adverse effect on the fair value of this
investment and the Corporation has concluded that the par value of this investment will be fully recoverable. No dividend was paid in the fourth quarter of 2008 and the payment of the first quarter 2009 dividend will depend on a comprehensive
earnings review by the FHLB Atlanta.
Impairment Analysis
Market prices may be affected by general market conditions which reflect prospects for the economy as a whole or by specific information pertaining to an industry or an individual company. Such declines are investigated by management.
Acting upon the premise that a write-down may be required, the Corporation considers all available evidence in its evaluation of whether the decline is other-than-temporary.
Current market pricing, which reflects a significant discount to cost, has been adversely affected by a significant reduction to liquidity, credit quality of the underlying collateral and the market perception that
defaults on the collateral underlying some of these securities could potentially increase significantly. As a result, the current fair value is substantially less than what the Corporation believes is indicated by the performance of the collateral
underlying the securities and calculations of expected cash flows. Although the Corporation has recognized OTTI equal to the difference between the cost basis and fair value for certain securities, the Corporation anticipates at this time, based on
the expected cash flows of the securities that it will recover some of these impairment amounts.
Changes in current market conditions, such as interest
rates and the economic uncertainties in the mortgage, housing and banking industries have severely constricted the structured securities market. The limited secondary market for various types of securities has negatively impacted securities values.
Accordingly, the Corporation performs a review of each investment security within the segments noted in the table on the next page to determine the nature of the decline in the value of investment securities. The Corporation evaluates if any of the
underlying securities have experienced OTTI. The Corporation begins by evaluating whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment (an impairment
indicator). Impairment indicators include, but are not limited to:
|
|
|
A significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the issuer.
|
|
|
|
A significant adverse change in the regulatory, economic, or technological environment of the issuer.
|
|
|
|
A significant adverse change in the general market condition of either the geographic area or the industry in which the issuer operates.
|
|
|
|
A bona fide offer to purchase (whether solicited or unsolicited), an offer by the issuer to sell, or a completed auction process for the same or similar security
for an amount less than the cost of the investment.
|
|
|
|
Factors that raise significant concerns about the issuers ability to continue as a going concern, such as negative cash flows from operations, working capital
deficiencies, or noncompliance with statutory capital requirements or debt covenants.
|
Numerous factors are considered in such an
evaluation and their relative significance varies from case to case. The Corporation believes that the following factors may, individually or in combination, indicate that a security should be evaluated further to determine if a decline may be
other-than-temporary and that a write-down of the carrying value maybe required:
|
|
|
The length of the time and the amount of price severity in which the market value has been less than cost.
|
|
|
|
External credit rating declines.
|
|
|
|
The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in
market conditions, technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential.
|
|
|
|
The intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair
value.
|
15
The Corporations OTTI evaluation process is performed in a consistent, systematic, and rational manner and includes
a disciplined evaluation of all available evidence. This process is applied at the individual security level and considers the causes, severity, length of time and anticipated recovery period of the impairment. Consideration is also given to
managements intent and ability to hold the security over the anticipated recovery period. Documentation is vigorous and extensive as necessary to support a conclusion as to whether a decline in market value below cost is other-than-temporary
and includes documentation supporting both observable and unobservable inputs and a rationale for conclusions reached.
The investment securities portfolio
is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI guidelines provided by the pertinent authoritative literature. FSP FAS 115-1 and FAS 124-1 The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments (FSP FAS 115-1) is applied to address considerations of whether an investment is considered impaired, whether the impairment is other-than-temporary and the measurement of an
impairment loss. Structured securities, including non-agency MBS, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA or purchased at a significant premium are evaluated using the
guidance of EITF Issue 99-20 Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets (EITF 99-20) in
addition to the guidance provided by SFAS No. 115 and FSP EITF 99-20-1. Securities determined to not have OTTI under EITF 99-20 are required to be evaluated using the guidance of SFAS No. 115. Impairment is assessed at the individual
security level. An investment security is considered impaired if the fair value of the security is less than its cost basis. Once the security is considered impaired, a determination must be made to see if the impairment is other-than-temporary. If
the security is considered other-than-temporarily impaired, an impairment loss is recorded to non-interest income. The OTTI assessment under the SFAS No. 115 segment is based on the performance of the issuer for corporate or municipal bonds, or
the collateral in the case of structured securities. The financial performance is evaluated to determine if the financial performance will adversely affect the contractual cash flows of the related security. The second segment of the portfolio uses
the OTTI guidance provided by EITF 99-20 that is specific to structured securities that, on the purchase date, were rated below AA or those purchased at a significant premium (generally 10% or more) which might result in the Corporation not
recovering substantially all of its investment. The evaluation for OTTI utilizes the best estimate of cash flows from a market participants perspective to determine fair value incorporating the risk of defaults. The cash flows are considered
to be adversely impacted if the present value of the future cash flows is less than the present value calculated in the prior period using the same methodology. For all securities evaluated under EITF 99-20 and SFAS No. 115, if the length of
time needed to recover becomes longer and the magnitude of the decline in value becomes more significant, the evaluation for OTTI of the individual security is more extensive.
The Corporation uses inputs provided by an independent third party service in establishing the fair value of the investment securities. These inputs are reviewed and validated by management prior to use in the
Corporations model. If current pricing indicates a price decline, the Corporation considers securities with significant price declines or deterioration in fair value in conjunction with the duration of such to determine whether an OTTI
evaluation is required. For structured bonds, an evaluation is performed internally using the industry standard third party modeling software. Other securities may require a separate credit evaluation performed internally unless the circumstances
dictate the use of an external credit evaluation. The evaluation focuses on the expected cash flows from the individual security taking into consideration the credit quality of the security, including the anticipated inherent losses indicated from
the underlying issuers or collateral, the probability of contractual cash flow shortfalls and the ability of the securities to absorb further economic declines. Credit support, if applicable and appropriate, is also considered when performing the
OTTI evaluation. All relevant information is considered including the credit history of the security and the business sector. All assumptions used to perform an evaluation of projected cash flows are corroborated from one or more market
participants. The cash flows used for the OTTI assessment are obtained from a market participant or developed internally, based on events and information that management estimates a market participant would use in determining the current value. For
securities not previously recognized as OTTI, a determination of adversely impacted cash flows will merit recognition as OTTI. Securities previously recognized as OTTI have their cash flows tested and the result compared to the appropriate benchmark
value to determine if further OTTI recognition is warranted.
Once the evaluation has been completed, a determination is made whether an individual
security is considered OTTI. The OTTI amount is recorded as impairment on investment securities in the period in which it occurs. Once the security is written down, it may not be written up unless the write-up is through yield accretion for the
securities as permitted by the appropriate accounting guidance. Furthermore, securities may continue to incur further OTTI after an initial write-down. These further write-downs are analyzed with respect to the new basis of the security that was
established from any previous write-downs. The written down value of the investment then becomes the new cost basis of the investment.
16
Discussion of Portfolio Types
The following table provides further detail of the investment securities portfolio at March 31, 2009.
Summary of
Investment Securities by Portfolio Type at March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
U.S. treasury and agency MBS
|
|
$
|
650,725
|
|
$
|
17,083
|
|
$
|
78
|
|
$
|
667,730
|
Municipal securities
|
|
|
150,146
|
|
|
3,676
|
|
|
240
|
|
|
153,582
|
Non-agency MBS
|
|
|
52,255
|
|
|
|
|
|
2,731
|
|
|
49,524
|
Bank and insurance pooled trust preferred securities
|
|
|
336,019
|
|
|
|
|
|
163,059
|
|
|
172,960
|
REIT pooled trust preferred securities
|
|
|
19,124
|
|
|
544
|
|
|
9,061
|
|
|
10,607
|
Corporate securities
|
|
|
103,274
|
|
|
1,049
|
|
|
42,669
|
|
|
61,654
|
FHLB Stock
|
|
|
38,114
|
|
|
|
|
|
|
|
|
38,114
|
Sovereign
|
|
|
400
|
|
|
|
|
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,350,057
|
|
$
|
22,352
|
|
$
|
217,838
|
|
$
|
1,154,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses associated with AAA rated U.S. Treasury, agency MBS securities are caused by changes in
interest rates and are not considered credit related since the contractual cash flows of these investments are backed by the full faith and credit of the U.S. government. Unrealized losses that are related to the prevailing interest rate environment
will decline over time and recover as these securities approach maturity.
The unrealized losses in the municipal securities portfolio are due to widening
credit spreads in the municipal securities market and are the result of concerns about the bond insurers associated with these securities. This portfolio segment is not experiencing any credit concerns at March 31, 2009 and the securities are
rated at least BBB. The Corporation believes that all contractual cash flows will be received on this portfolio.
The non-agency MBS portfolio has
experienced various levels of price declines over the past twelve months. The non-agency MBS have experienced price declines due to the current securities market environment and the currently limited secondary market for such securities, in addition
to issue specific credit deterioration. Certain non-agency MBS securities have been other-than-temporarily impaired and the value of these securities was reduced and a corresponding charge to earnings was recognized. The non-agency MBS portfolio was
written down by $16.6 million for the three months ended March 31, 2009 and $53.2 million for the twelve months ended December 31, 2008. Management determined through its evaluation of other-than-temporary impairment that there is
increased uncertainty as to whether the Corporation will receive all of its contractual principal and interest payments. Management has determined that there was not sufficient persuasive evidence to conclude that the impairment was temporary.
Management monitors the actual mortgage delinquencies, foreclosures and losses for each security, as well as future expected losses in the underlying mortgage collateral to determine if there is a high probability for expected losses and contractual
shortfalls of interest or principal, which could warrant further recognition of impairment. For each security, the credit support is also assessed to determine whether it can absorb the projected loan losses. Management believes that based on its
analysis, that all non-agency MBS that have not been written down have adequate credit support to cover the projected loan losses.
Prices in the bank and
insurance pooled trust preferred securities portfolio continue to decline due to increase defaults illiquidity and reduced demand for these securities. Additionally, there has been no primary issuance and little secondary market trading for these
types of securities. At March 31, 2009, the Corporation believes that the credit quality of most of these securities remains adequate to absorb further economic declines. However, seventeen securities had OTTI totaling $69.3 million that has
been recognized at March 31, 2009 compared to nine securities totaling $30.5 million at December 31, 2008. At March 31, 2009, of the nine securities which had OTTI at December 31, 2008, seven incurred further OTTI. Additionally,
ten other securities experienced OTTI in the first quarter of 2009. After cash flow testing of these securities using default and loss assumptions derived from a third party credit source with expertise in bank credit quality, fifteen securities
failed the models projected cash flow test although as of March 31, 2009, they are current as to interest and principal payments. Two additional securities failed a stress test of the models loss expectations. As a result, all
seventeen were deemed OTTI. Fifteen issuances have contractually deferred their interest payments, of which twelve are not considered OTTI.
During 2009
and 2008, the Corporation recognized that certain REIT pooled trust preferred securities were other-than-temporarily impaired and, accordingly, these securities have been written down to their fair value. The REIT pooled trust preferred securities
portfolio was written down by $1.5 million for the three months ended March 31, 2009 and $36.9 million for the twelve months ending December 31, 2008. Management determined through its evaluation of other-than-temporary impairment that
there is increased uncertainty as to whether the Corporation will receive all of its contractual principal and interest payments. The remaining unrealized losses on these securities are considered temporary in nature. The Corporation believes that
these securities have sufficient credit subordination to withstand projected losses without impacting the securities cash flows. The Corporation
17
analyzes the current level of defaults by issue, forecasts defaults of specific issuers and unspecified issuers along with determining the threshold of
defaults necessary for interest to be curtailed. In addition, the credit ratings for these securities are also reviewed. This analysis is used to forecast each securitys ability to make its contractual interest and principal payments and
assist in the impairment determination.
The unrealized losses in the corporate securities portfolio are associated with the widening spreads in the
financial sector of the corporate bond market. At March 31, 2009, all of the securities are current as to principal and interest payments, and are expected to remain so in the future.
At March 31, 2009, many investment securities discussed above have unrealized losses that are considered temporary in nature because the decline in fair value was
due to the illiquid markets and the interest rate environment and not caused by cash flow impairment. The Corporation has the intent and ability to hold these securities until recovery, which may be maturity.
Other-than-Temporary Losses
Listed below is the impairment
recognized as OTTI recorded on certain securities described above by the Corporation for the periods indicated.
Impairment on Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q 2008
|
|
2Q 2008
|
|
3Q 2008
|
|
4Q 2008
|
|
Total
2008
|
|
1Q 2009
|
REIT pooled trust preferred securities
|
|
$
|
19,439
|
|
$
|
14,817
|
|
$
|
619
|
|
$
|
2,072
|
|
$
|
36,947
|
|
$
|
1,468
|
Non-agency MBS securities
|
|
|
23,216
|
|
|
5,931
|
|
|
19,790
|
|
|
4,310
|
|
|
53,247
|
|
|
16,650
|
Bank trust preferred securities
|
|
|
|
|
|
|
|
|
4,161
|
|
|
26,356
|
|
|
30,517
|
|
|
69,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,655
|
|
$
|
20,748
|
|
$
|
24,570
|
|
$
|
32,738
|
|
$
|
120,711
|
|
$
|
87,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The additional write-downs of the securities from December 31, 2008 to March 31, 2009 were the result of
the continued OTTI review discussed above as these securities have experienced high levels of mortgage delinquencies relative to the credit support remaining in the securities structures due to further credit impairment of certain home
builders and mortgage REITs that represent the collateral for these securities, or in the case of the bank pooled trust portfolio, due to the inadequacy of credit support to withstand projected issuer defaults over the remaining life of the
securities.
18
NOTE 4LOANS
The table below presents a summary of loans outstanding as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31,
2009
|
|
December 31,
2008
|
|
March 31,
2008
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
Originated and acquired residential mortgage
|
|
$
|
242,297
|
|
$
|
250,011
|
|
$
|
280,772
|
Home equity
|
|
|
1,169,911
|
|
|
1,169,567
|
|
|
1,082,606
|
Other consumer:
|
|
|
|
|
|
|
|
|
|
Marine
|
|
|
331,263
|
|
|
341,458
|
|
|
360,343
|
Other
|
|
|
20,929
|
|
|
24,881
|
|
|
25,634
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,764,400
|
|
|
1,785,917
|
|
|
1,749,355
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
Commercial mortgage
|
|
|
571,720
|
|
|
565,999
|
|
|
488,309
|
Residential construction
|
|
|
487,703
|
|
|
530,589
|
|
|
596,698
|
Commercial construction
|
|
|
498,959
|
|
|
483,822
|
|
|
445,475
|
Commercial business
|
|
|
989,697
|
|
|
990,471
|
|
|
922,840
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
2,548,079
|
|
|
2,570,881
|
|
|
2,453,322
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
4,312,479
|
|
$
|
4,356,798
|
|
$
|
4,202,677
|
|
|
|
|
|
|
|
|
|
|
NOTE 5ALLOWANCE FOR LOAN LOSSES
The table below presents the activity in the allowance for loan losses for the periods indicated:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in thousands)
|
|
2009
|
|
2008
|
Balance at beginning of period
|
|
$
|
73,098
|
|
$
|
55,269
|
Provision for loan losses
|
|
|
35,610
|
|
|
3,114
|
Less loans charged-off, net of recoveries:
|
|
|
|
|
|
|
Originated and acquired residential mortgage
|
|
|
709
|
|
|
225
|
Home equity
|
|
|
2,074
|
|
|
237
|
Marine and other consumer
|
|
|
1,040
|
|
|
438
|
Commercial mortgage
|
|
|
207
|
|
|
|
Residential construction
|
|
|
6,951
|
|
|
320
|
Commercial business
|
|
|
2,475
|
|
|
1,914
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
13,456
|
|
|
3,134
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
95,252
|
|
$
|
55,249
|
|
|
|
|
|
|
|
19
NOTE 6INTANGIBLE ASSETS
The table below presents an analysis of the goodwill and deposit-based intangible activity for the three months ended March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Goodwill
|
|
Accumulated
Amortization
|
|
|
Net
Goodwill
|
|
Balance at December 31, 2008
|
|
$
|
255,952
|
|
$
|
(622
|
)
|
|
$
|
255,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
255,952
|
|
$
|
(622
|
)
|
|
$
|
255,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Deposit-based
Intangible
|
|
Accumulated
Amortization
|
|
|
Net
Deposit-based
Intangible
|
|
Balance at December 31, 2008
|
|
$
|
10,873
|
|
$
|
(5,987
|
)
|
|
$
|
4,886
|
|
Chevy Chase deposit purchase
|
|
|
461
|
|
|
|
|
|
|
461
|
|
Amortization expense
|
|
|
|
|
|
(327
|
)
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
11,334
|
|
$
|
(6,314
|
)
|
|
$
|
5,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management tests goodwill for impairment annually unless a significant triggering event occurs. At March 31,
2009, the Corporation believes no impairment charge is required. During the first quarter of 2009, the Corporation settled on the purchase of $20.0 million of deposits from Chevy Chase Bank, and accordingly, the premium paid for these deposits is
reflected in the table above. This premium will be amortized using the straight line method over a period of seven years.
NOTE 7DEPOSITS
The table below presents a summary of deposits as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31,
2009
|
|
December 31,
2008
|
|
March 31,
2008
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
487,216
|
|
$
|
443,729
|
|
$
|
488,010
|
Money market
|
|
|
691,105
|
|
|
625,859
|
|
|
652,379
|
Savings
|
|
|
625,955
|
|
|
585,356
|
|
|
549,243
|
Direct time certificates of deposit
|
|
|
1,228,610
|
|
|
1,205,724
|
|
|
1,091,668
|
Brokered certificates of deposit
|
|
|
1,084,479
|
|
|
1,239,220
|
|
|
903,038
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
4,117,365
|
|
|
4,099,888
|
|
|
3,684,338
|
Noninterest-bearing deposits
|
|
|
702,959
|
|
|
652,816
|
|
|
686,289
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
4,820,324
|
|
$
|
4,752,704
|
|
$
|
4,370,627
|
|
|
|
|
|
|
|
|
|
|
20
NOTE 8SHORT-TERM BORROWINGS
The table below presents a summary of short-term borrowings as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31,
2009
|
|
December 31,
2008
|
|
March 31,
2008
|
Securities sold under repurchase agreements
|
|
$
|
211,843
|
|
$
|
197,964
|
|
$
|
241,921
|
Federal funds purchased
|
|
|
|
|
|
80,000
|
|
|
205,000
|
Federal Home Loan Bank advancesfixed rate
|
|
|
100,000
|
|
|
100,000
|
|
|
75,000
|
Federal term auction
|
|
|
|
|
|
|
|
|
150,000
|
Other short-term borrowings
|
|
|
2,535
|
|
|
2,824
|
|
|
13,025
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
$
|
314,378
|
|
$
|
380,788
|
|
$
|
684,946
|
|
|
|
|
|
|
|
|
|
|
NOTE 9LONG-TERM DEBT
The table below presents a summary of long-term debt as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31,
2009
|
|
December 31,
2008
|
|
March 31,
2008
|
Federal Home Loan Bank advancesfixed rate
|
|
$
|
40,000
|
|
$
|
40,000
|
|
$
|
90,000
|
Federal Home Loan Bank advancesvariable rate
|
|
|
430,000
|
|
|
455,000
|
|
|
545,000
|
Junior Subordinated Debentures
|
|
|
136,469
|
|
|
136,511
|
|
|
136,640
|
Subordinated notes
|
|
|
47,962
|
|
|
47,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
654,431
|
|
$
|
679,409
|
|
$
|
771,640
|
|
|
|
|
|
|
|
|
|
|
On April 24, 2008, the Corporations wholly owned subsidiary, Provident Bank, completed a private
placement of $50.0 million of subordinated unsecured notes that are rated BBB to qualified institutional buyers and accredited investors. The issuance price of the subordinated notes was 97.651% of the principal amount. The subordinated notes bear
interest at a fixed rate of 9.5% and mature on May 1, 2018, with semi-annual interest payments payable on May 1 and November 1 of each year beginning on November 1, 2008. The subordinated notes are not convertible. Beginning on
May 1, 2013, Provident Bank may redeem some or all of the subordinated notes, at any time, at a price equal to 100% of the principal amount of such notes redeemed plus accrued and unpaid interest to the redemption date. Proceeds from the debt
offering, net of issuance costs, totaled $47.7 million and were used at that time to decrease brokered certificates of deposit and fed funds purchased. This debt qualifies as Tier II capital under regulatory capital guidelines.
NOTE 10STOCKHOLDERS EQUITY
Share-Based Payment Plan
Description
The Corporation issues nonqualified stock options and restricted stock grants to certain of its employees and directors pursuant to the
2004 Equity Compensation Plan (the Plan), which has been approved by the Corporations shareholders. The Plan allows for a maximum of 12.5 million shares of common stock to be issued. At March 31, 2009, 2.8 million
shares were available to be granted by the Corporation pursuant to the Plan.
Stock Option Awards
Stock options (options) are granted with an exercise price equal to the market price of the Corporations shares at the date of the grant. All options
issued prior to January 1, 2005 have contractual terms of ten years and are vested. Options granted subsequent to January 1, 2005 vest based on four years of continuous service and have eight-year contractual terms.
All options provide for accelerated vesting upon a change in control (as defined in the Plan). Stock options exercised result in the issuance of new shares.
21
On the date of each grant, the fair value of each award is estimated using the Black-Scholes option pricing model based
on assumptions made by the Corporation as follows:
|
|
|
Dividend yield is based on the dividend rate of the Corporations stock at the date of the grant
|
|
|
|
Risk-free interest rate is based on the U.S. Treasury zero-coupon bond rate with a term equaling the expected life of the granted options
|
|
|
|
Expected volatility is based on the historical volatility of the Corporations stock price
|
|
|
|
Expected life represents the period of time that granted options are expected to be outstanding based on historical trends
|
Below is a tabular presentation of the option pricing assumptions and the estimated fair value of the options granted during the periods indicated using these
assumptions. The Corporation did not grant stock options during the quarter ended March 31, 2009, therefore, no data for the quarter is presented.
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2009
|
|
2008
|
Weighted average dividend yield
|
|
|
|
7.39%
|
Weighted average risk-free interest rate
|
|
|
|
2.98%
|
Weighted average expected volatility
|
|
|
|
20.73%
|
Weighted average expected life
|
|
|
|
5.25 years
|
Weighted average fair value of options granted
|
|
|
|
$1.26
|
The Corporation recognized compensation expense related to options of $346 thousand and $221 thousand for the
three months ended March 31, 2009 and 2008, respectively. There were no options exercised for the three months ended March 31, 2009, therefore, there was no intrinsic value of options exercised for the three months ended March 31,
2009. The intrinsic value of options exercised for the three months ended March 31, 2008 was $49 thousand. Unrecognized compensation cost related to non-vested options was $3.0 million and $3.5 million at March 31, 2009 and 2008,
respectively, and is expected to be recognized over a weighted average period of 2.6 years and 3.4 years, respectively.
The table below presents a summary
option activity for the period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Contractual
Remaining Life
(in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Options outstanding at December 31, 2008
|
|
3,697,348
|
|
|
$
|
22.64
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
(10,765
|
)
|
|
$
|
25.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2009
|
|
3,686,583
|
|
|
$
|
22.63
|
|
5.40
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2009
|
|
2,098,662
|
|
|
$
|
27.05
|
|
4.29
|
|
$
|
|
Restricted Stock Awards
The Corporation issues restricted stock grants, in the form of new shares, to its directors and certain key employees. The restricted stock grants are issued at the fair market value of the common shares on the date
of each grant. The Corporation grants shares of restricted stock to directors of the Corporation as part of director compensation, and as such, those restricted stock grants vest immediately. The restricted stock grants to the directors may not be
sold or otherwise divested until six months subsequent to their departure from the board of directors. The restricted stock grants to employees vest ratably over four years. Certain amounts of restricted share grants to key executives are
performance based and may vest ratably over a period of two years once the market price of the Corporations stock achieves specified benchmarks for a required period of time.
22
Expense recorded relating to restricted stock grants to directors and employees is presented in the following table:
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in thousands)
|
|
2009
|
|
2008
|
Grants to directors
|
|
$
|
|
|
$
|
|
Grants to employees
|
|
$
|
493
|
|
$
|
300
|
Fair value of grants vested
|
|
$
|
1,512
|
|
$
|
1,131
|
The following table presents a summary of the activity related to restricted stock grants for the period
indicated:
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
Weighted Average
Grant Fair Value
|
Unvested at December 31, 2008
|
|
345,000
|
|
|
$
|
15.90
|
Granted
|
|
|
|
|
|
|
Vested
|
|
(56,340
|
)
|
|
$
|
26.84
|
Cancelled
|
|
(173
|
)
|
|
$
|
17.37
|
|
|
|
|
|
|
|
Unvested at March 31, 2009
|
|
288,487
|
|
|
$
|
13.76
|
|
|
|
|
|
|
|
At March 31, 2009, unrecognized compensation cost related to non-vested restricted stock grants was $3.5
million and is expected to be recognized over a weighted average period of 2.2 years.
Common Stock and Mandatory Convertible Non-Cumulative Preferred
Stock Offering
On April 9, 2008, the Corporation entered into a Stock Purchase Agreement (the Agreement) with certain institutional
and individual accredited investors and certain officers of the Corporation and members of the Corporations Board of Directors in connection with the private placement of approximately $64.8 million of its capital stock. The Agreement provided
for the sale of 1,422,110 shares of common stock at a price of $9.50 per share ($10.80 for officers and directors of the Corporation, which was the closing bid price on April 8, 2008, the date prior to the execution of the Agreement), and
51,215 shares of a newly created class of Series A Mandatory Convertible Non-Cumulative Preferred Stock (the Series A Preferred) at a purchase price and liquidation preference of $1,000 per share. The transaction closed on
April 14, 2008. Net proceeds from the common and preferred stock offering totaled $62.4 million. Proceeds from the capital issuance was used to decrease brokered certificates of deposit and fed funds purchased.
Each share of Series A Preferred will automatically convert into 95.238 shares of common stock on April 1, 2011. Holders may elect to convert their preferred shares
at any time prior to that date. The conversion rate will be subject to customary anti-dilution adjustments. The discount on the preferred stock conversion feature provides a benefit to the preferred stockholders which was recognized as a non-cash
dividend in the financial statements in the second quarter of 2008. This recognition did not result in any impact on the Corporations capital.
The
Series A Preferred pays dividends in cash, when declared by the Board of Directors, at a rate of 10.0% per annum on the liquidation preference of $1,000 per share, payable quarterly in arrears. In the event that the Corporation increases its
quarterly dividend on its common stock above $0.165, the holders of the Series A Preferred will be entitled to an additional dividend at a rate per annum equal to the percentage increase above $0.165 multiplied by 10.0%. No dividends may be paid on
the Corporations common stock unless dividends have been paid in full on the Series A Preferred. As of March 31, 2009, 8,715 preferred shares have been converted to 829,997 shares of common stock.
Troubled Asset Relief Program
In November 2008, as part of the
Troubled Asset Relief Program (TARP) Capital Purchase Program, the Corporation entered into a Purchase Agreement with the United States Department of the Treasury, pursuant to which Provident sold 151,500 shares of the Corporations
Fixed Rate Cumulative Perpetual Preferred Stock, Series B and a warrant to purchase 2,374,608 shares of the Corporations common stock, par value $1.00 per share, for an aggregate purchase price of $151.5 million in cash. This capital is
considered Tier 1 capital.
The senior preferred stock pays a dividend of 5% per year for the first five years and resets to 9% per year
thereafter. In accordance with the recently enacted American Recovery and Reinvestment Act of 2009 and related guidance from the United States Department of the Treasury, the senior preferred stock may be redeemed at any time at the option of the
Corporation,
23
subject to consultation with the Corporations primary federal banking regulator, provided that any partial redemption must be for at least 25% of the
issue price of the senior preferred stock. Any redemption of the senior preferred stock would be at one hundred percent (100%) of its issue price, plus any accrued and unpaid dividends. The senior preferred stock may be redeemed without regard
to whether the Corporation has replaced such funds from any other source or to any waiting period. Upon redemption of the senior preferred stock the United States Department of the Treasury will liquidate any warrants issued in connection with the
senior preferred stock at the current market price. Dividends paid on the senior shares are cumulative. The stock warrant was issued with an initial exercise price of $9.57. The warrant has a ten year term and is exercisable immediately, in whole or
in part, over the term of 10 years. Any common shares issued under the exercise of the warrant are non-voting shares. If the Corporation raises common or perpetual preferred equity equal to or at least 100% of the senior preferred shares issued
under TARP by December 31, 2009, the number of convertible shares relating to the warrant shall be reduced by 50%. The terms of TARP also include certain limitations on executive compensation.
In conjunction with the issuance of the senior preferred shares and the stock warrant, the stock warrant was allocated a portion of the $151.5 million issuance proceeds
as required by current accounting standards. The allocation of this value was based on the relative fair value of the senior preferred shares and the stock warrants to the combined fair value. Accordingly, the value of the stock warrant was
determined to be $13.2 million which was allocated from the proceeds and recorded in additional paid-in capital in the Condensed Consolidated Statements of Condition. This non-cash amount is considered a discount to the preferred stock and is
amortized over a five year period using the interest method and accreted as a dividend recorded on the senior preferred shares. For the quarter ended March 31, 2009, the Corporation recorded $562 thousand in amortization of the preferred stock
discount. The warrant is included in the diluted average common shares outstanding, if dilutive.
Stock Repurchase Program
During 1998, the Corporation initiated a stock repurchase program for its outstanding stock. Generally, under the provisions of the participation in TARP the Corporation
may not repurchase shares for three years unless the preferred shares issued under the TARP program have been redeemed in whole or all of the preferred shares have been transferred to unaffiliated third parties. Under specific circumstances that
have been consented to by the Treasury, the Corporation may from time to time repurchase common shares.
Prior to the participation in TARP, the
Corporation approved certain amounts to be repurchased on an annual basis. These purchases would occur in the open market from time to time and on an ongoing basis, depending upon market conditions.
NOTE 11DERIVATIVE FINANCIAL INSTRUMENTS
Fair value hedges that
meet the criteria for hedge accounting have changes in the fair value of the derivative and the designated hedged item recognized in earnings. At December 31, 2008, the Corporation held interest rate swaps with a notional amount of $493.6
million that hedged the fair value of certain brokered certificates of deposit. During the first quarter of 2009, an assessment of hedge effectiveness was performed for all fair value hedge positions using long-haul method. The quarterly measurement
of hedge effectiveness indicated that $157.4 million of the $493.6 million notional amount in fair value hedging relationships were no longer considered effective for hedge accounting and the derivatives were then classified as non-designated
derivatives as of January 1, 2009. The loss of hedge accounting was primarily the result of the relatively small quarter-to-quarter changes in the benchmark interest rates that occurred between December 31, 2008 and March 31, 2009.
For these hedge positions, no additional mark to market was recorded on the designated hedge item in the quarter ended March 31, 2009. A charge of $30 thousand was made to earnings for the period ended March 31, 2009 for the ineffective
portion of the hedge relating to changes in fair value for swaps with a notional amount of $336.2 million and brokered certificates of deposit that meet the criteria for hedge accounting. Income associated with interest rate swaps that met hedge
accounting was $1.6 million for the quarter and was recorded as an off-set to brokered certificate of deposit interest expense. At March 31, 2008, the Corporation held no derivatives designated as fair value hedges as of March 31, 2008.
Cash flow hedges have the effective portion of changes in the fair value of the derivative, net of taxes, recorded in net accumulated other comprehensive
loss. At March 31, 2009, the Corporation held $121.3 million of interest rate swaps hedging future cash flows associated with floating rate bonds. For the three months ended March 31, 2009, the Corporation recorded a decrease in the value
of derivatives of $883 thousand compared to an increase of $3.6 million for the same period in 2008, net of taxes, in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. Amounts recorded in net accumulated
other comprehensive loss are recognized into earnings concurrent with the impact of the hedged item on earnings. For the three months ending March 31, 2009 and 2008, the ineffectiveness portion of the cash flow hedges resulted in a credit to
earnings of $10 thousand and $9 thousand respectively.
24
Non-designated derivatives represent interest rate protection on the Corporations net interest income or are
derivative products provided to customers but do not meet the accounting requirements to receive hedge accounting treatment. As of March 31, 2009, the Corporation held $250.8 million of non-designated derivatives which include $157.4 million of
fair value hedging relationships previously discussed that no longer meet the criteria for hedge accounting and $93.4 million of customer-related derivatives. Interest rate swaps that are classified as non-designated derivatives are marked-to-market
and any gains or losses are recorded in non-interest income during each reporting period. The value of the non-designated derivatives are recorded at fair value on the Condensed Consolidated Statements of Condition. For the three months ended
March 31, 2009 and 2008, the Corporation recorded net a gain of $35 thousand and a net loss of $266 thousand, respectively, to reflect the change in the value of the non-designated interest rate swaps. The net cash settlements on these interest
rate swaps are recorded in non-interest income. The net cash benefit from these interest rate swaps was $1.0 million and $296 thousand for the three months ended March 31, 2009 and 2008, respectively. These transactions are recorded in net
derivative activities on the Condensed Consolidated Statements of Operations.
The derivative values as of March 31, 2009 incorporate a credit
valuation adjustment of $599 thousand. An analysis of each counterparty is performed to determine what, if any, adjustment should be made to the derivative valuations to take into account the non-performance risk associated with each counterparty.
For each counterparty, the analysis considered: the value of all derivative contracts, the amount of collateral posted, the terms of collateral agreements, size and nature of the derivative position, potential future movements in market rates and
derivative values, counterparty credit worthiness, probability of default and consideration of loss severity.
Where allowable under the derivative
agreements, the Corporation obtains collateral to reduce counterparty risk associated with its open derivative positions. At March 31, 2009, cash collateral of $17.4 million was included in the Condensed Consolidated Statement of Condition.
This amount has not been netted against the derivative positions for purposes of presentation.
25
The table below presents the Corporations open derivative positions as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
Derivative Type
|
|
Objective
|
|
Notional
Amount
|
|
Credit Risk
Amount
|
|
Market
Risk
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed/pay variable
|
|
Hedge investment risk
|
|
$
|
121,250
|
|
$
|
4,221
|
|
$
|
3,685
|
|
Receive fixed/pay variable
|
|
Hedge borrowing cost
|
|
|
336,200
|
|
|
10,689
|
|
|
9,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total designated derivatives
|
|
|
|
|
457,450
|
|
|
14,910
|
|
|
13,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-designated Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive variable/pay fixed
|
|
|
|
|
36,771
|
|
|
|
|
|
(1,285
|
)
|
Receive fixed/pay variable
|
|
|
|
|
194,171
|
|
|
9,994
|
|
|
9,174
|
|
Interest rate caps/corridors
|
|
|
|
|
19,847
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-designated derivatives
|
|
|
250,789
|
|
|
10,024
|
|
|
7,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
708,239
|
|
$
|
24,934
|
|
$
|
20,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed/pay variable
|
|
Hedge investment risk
|
|
$
|
128,250
|
|
$
|
4,680
|
|
$
|
4,489
|
|
Receive fixed/pay variable
|
|
Hedge borrowing cost
|
|
|
493,600
|
|
|
16,851
|
|
|
16,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total designated derivatives
|
|
|
|
|
621,850
|
|
|
21,531
|
|
|
20,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-designated Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive variable/pay fixed
|
|
|
|
|
36,771
|
|
|
|
|
|
(1,284
|
)
|
Receive fixed/pay variable
|
|
|
|
|
36,771
|
|
|
1,465
|
|
|
1,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-designated derivatives
|
|
|
73,542
|
|
|
1,465
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
695,392
|
|
$
|
22,996
|
|
$
|
21,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed/pay variable
|
|
Hedge investment rate risk
|
|
$
|
255,450
|
|
$
|
10,151
|
|
$
|
10,151
|
|
Interest rate caps/corridors
|
|
Hedge borrowing cost
|
|
|
25,000
|
|
|
7
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total designated derivatives
|
|
|
|
|
280,450
|
|
|
10,158
|
|
|
10,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-designated Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive variable/pay fixed
|
|
|
|
|
4,000
|
|
|
|
|
|
(11
|
)
|
Receive fixed/pay variable
|
|
|
|
|
4,000
|
|
|
27
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-designated derivatives
|
|
|
8,000
|
|
|
27
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
288,450
|
|
$
|
10,185
|
|
$
|
10,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Credit risk represents the amount that is due from the counterparty, including accrued interest, associated with the open
derivatives positions at March 31, 2009, December 31, 2008 and March 31, 2008. The amounts are recorded as an asset on the Condensed Consolidated Statements of Condition and are not netted against any amounts payable to the
counterparty. Market risk represents the net fair value of amounts due from or payable to the counterparty, net of accrued interest.
The table below
discloses the net fair values of derivative financial instruments.
|
|
|
|
|
|
|
|
|
Derivatives Fair Value
|
|
|
Location on
Statement of Condition
|
|
|
Other
Assets
|
|
Other
Liabilities
|
March 31, 2009
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
14,510
|
|
$
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
9,746
|
|
|
1,304
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
20,873
|
|
$
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
1,439
|
|
|
1,284
|
|
|
|
March 31, 2008
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
10,158
|
|
$
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
27
|
|
|
11
|
27
The table below discloses the impact of derivative financial instruments on the Corporations Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(in thousands)
|
Derivatives in Fair Value
Hedging Relationships
|
|
Location of gain or
(loss) recognized
in
income on derivative
|
|
Amount of gain or
(loss) recognized in
income on derivative
|
|
Location of gain or
(loss) recognized
in
income on hedged item
|
|
Amount of gain or
(loss) recognized in
income on hedged item
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
2009
|
|
2008
|
Interest rate contracts
|
|
Interest expense
|
|
$
|
(1,581
|
)
|
|
$
|
|
|
Interest expense
|
|
$
|
4,100
|
|
$
|
|
Interest rate contracts
|
|
Other income
|
|
|
(381
|
)
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow
Hedging Relationships
|
|
Amount of gain or
(loss) recognized in
OCI on derivative
(effective portion)
|
|
Location of gain or
(loss) reclassified
from accumulated
OCI into income
(effective
portion)
|
|
Amount of gain or
(loss) reclassified
from accumulated
OCI into
income
(effective portion)
|
|
|
Location of gain or
(loss) recognized in
income on derivative
(ineffective portion and
amount excluded from
effectiveness testing)
|
|
Amount of gain or
(loss) recognized in
income on derivative
(ineffective portion and
amount excluded from
effectiveness testing)
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
2009
|
|
2008
|
Interest rate contracts
|
|
$
|
(883
|
)
|
|
$
|
3,577
|
|
Interest income
|
|
$
|
(19
|
)
|
|
$
|
(44
|
)
|
|
Other income
|
|
$
|
10
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as
Hedging Instruments
|
|
Location of gain or
(loss) recognized in
income on derivative
|
|
Amount of gain or
(loss) recognized in
income on derivative
|
|
|
|
|
|
|
2009
|
|
2008
|
Interest rate contracts
|
|
Other income
|
|
$
|
1,052
|
|
$
|
30
|
NOTE 12CONTINGENCIES AND OFF-BALANCE SHEET RISK
Commitments
The table below presents commitments to extend credit in
the form of consumer, commercial real estate and business loans at the date indicated:
|
|
|
|
(in thousands)
|
|
March 31,
2009
|
Commercial business and real estate
|
|
$
|
693,981
|
Consumer revolving credit
|
|
|
810,853
|
Residential mortgage credit
|
|
|
15,867
|
Performance standby letters of credit
|
|
|
144,743
|
Commercial letters of credit
|
|
|
|
|
|
|
|
Total loan commitments
|
|
$
|
1,665,444
|
|
|
|
|
Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do
not necessarily represent realizable future cash requirements.
Litigation
The Corporation is involved in various legal actions that arise in the ordinary course of its business. All active lawsuits entail amounts which management believes to be, individually and in the aggregate, immaterial
to the financial condition and the results of operations of the Corporation.
In 2005, a lawsuit captioned
Bednar v. Provident Bank of Maryland
was
initiated by a former Bank customer against the Bank in the Circuit Court for Baltimore City (Maryland) asserting that, upon early payoff, the Banks recapture of home equity loan closing costs initially paid by the Bank on the borrowers
behalf constituted a prepayment charge prohibited by state law. The Baltimore City Circuit Court ruled in the Banks favor, finding that the recapture of loan closing costs was not an unlawful charge, a position consistent with that taken by
the State of Maryland Commissioner of Financial Regulation. The plaintiff appealed to the Court of Special Appeals. The Court of Appeals granted certiorari and reversed, finding that Providents recapture of closing costs is a
prepayment charge. The case was remanded to the trial court for further proceedings. Following the remand, the parties entered into settlement discussions. The parties have recently agreed in principle to a settlement and are in the
process of documenting that settlement. The agreed upon settlement for this individual matter is not material to the Corporations financial statements.
28
On December 30, 2008, an action captioned
Gilbert Feldman v. Provident Bankshares Corporation
,
et
al
. was filed in the Circuit Court for Baltimore City, Maryland on behalf of a putative class of Provident stockholders against Provident, certain of its current and former directors, and M&T Bank Corporation (M&T). The
complaint alleges that the Provident director defendants breached their fiduciary duties of loyalty, good faith, due care and disclosure by approving the merger, and that M&T aided and abetted in such breaches of duty. The complaint seeks, among
other things, an order enjoining the defendants from proceeding with or consummating the merger, and other equitable relief. Provident and M&T believe the claims are without merit and intend to defend the lawsuit vigorously.
NOTE 13NET GAINS (LOSSES)
Net gains (losses) include the
following components for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
(in thousands)
|
|
2009
|
|
2008
|
|
Net gains (losses):
|
|
|
|
|
|
|
|
Securities related activity
|
|
$
|
249
|
|
$
|
|
|
Asset sales
|
|
|
181
|
|
|
26
|
|
Extinguishment of debt and early redemption of brokered CDs
|
|
|
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
Net gains (losses)
|
|
$
|
430
|
|
$
|
(191
|
)
|
|
|
|
|
|
|
|
|
NOTE 14INCOME TAXES
Effective January 1, 2007, the Corporation adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48), which prescribes the
recognition and measurement of tax positions taken or expected to be taken in a tax return. FIN No. 48 provides guidance for de-recognition and classification of previously recognized tax positions that did not meet the certain recognition
criteria in addition to recognition of interest and penalties, if necessary. The Corporations policy is to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense on the Condensed Consolidated
Statements of Operations. The Corporation did not have any material unrecognized tax benefits and no interest and penalties were required to be recognized at March 31, 2009 and 2008, respectively. The tax years that remain subject to
examination are 2005 through 2008 for both the Federal and State of Maryland tax authorities.
29
NOTE 15LOSS PER SHARE
The following table presents a summary of per share data and amounts for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31
|
|
(in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
Net loss
|
|
$
|
(67,216
|
)
|
|
$
|
(17,622
|
)
|
Less: preferred stock dividends and amortization of preferred stock discount
|
|
|
3,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(70,907
|
)
|
|
$
|
(17,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS shares
|
|
|
33,459
|
|
|
|
31,537
|
|
Basic EPS
|
|
$
|
(2.12
|
)
|
|
$
|
(0.56
|
)
|
|
|
|
Common stock equivalents
|
|
|
|
|
|
|
|
|
Dilutive EPS shares
|
|
|
33,459
|
|
|
|
31,537
|
|
Dilutive EPS
|
|
$
|
(2.12
|
)
|
|
$
|
(0.56
|
)
|
|
|
|
Antidilutive shares
|
|
|
3,691
|
|
|
|
2,628
|
|
Common stock equivalents are composed of potentially convertible preferred stock and shares associated with
stock-based compensation. Common stock equivalents have been excluded from the computation of dilutive EPS if the result would be anti-dilutive. Inclusion of common stock equivalents in the diluted EPS calculation will only occur in circumstances
where net income is high enough to result in dilution.
Basic earnings per share is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Basic earnings per share does not include the effect of any potentially dilutive transactions or conversions. Diluted earnings per share reflects the potential dilution of earnings per share which could
occur under the treasury stock method if contracts to issue common stock, such as stock options, were exercised and shared in corporate earnings.
NOTE
16COMPREHENSIVE INCOME (LOSS)
Presented below is a reconciliation of net income (loss) to comprehensive income (loss) including the components of
other comprehensive income (loss) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
(in thousands)
|
|
Before
Income
Tax
|
|
|
Tax
Expense
(Benefit)
|
|
|
Net of
Tax
|
|
|
Before
Income
Tax
|
|
|
Tax
Expense
(Benefit)
|
|
|
Net of
Tax
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses arising during the year
|
|
$
|
(65,762
|
)
|
|
$
|
(25,841
|
)
|
|
$
|
(39,921
|
)
|
|
$
|
(66,025
|
)
|
|
$
|
(25,691
|
)
|
|
$
|
(40,334
|
)
|
Reclassification of gains realized in net income
|
|
|
87,416
|
|
|
|
34,351
|
|
|
|
53,065
|
|
|
|
42,655
|
|
|
|
16,596
|
|
|
|
26,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities arising during the year
|
|
|
21,654
|
|
|
|
8,510
|
|
|
|
13,144
|
|
|
|
(23,370
|
)
|
|
|
(9,095
|
)
|
|
|
(14,275
|
)
|
Net unrealized gains (losses) from derivative activities arising during the year
|
|
|
(1,477
|
)
|
|
|
(588
|
)
|
|
|
(889
|
)
|
|
|
5,897
|
|
|
|
2,326
|
|
|
|
3,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gain (loss)
|
|
$
|
20,177
|
|
|
$
|
7,922
|
|
|
|
12,255
|
|
|
$
|
(17,473
|
)
|
|
$
|
(6,769
|
)
|
|
|
(10,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(67,216
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
$
|
(54,961
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(28,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
NOTE 17EMPLOYEE BENEFIT PLANS
The actuarially estimated net benefit cost includes the following components for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
Qualified
Pension Plan
|
|
|
Non-qualified
Pension Plan
|
|
Postretirement
Benefit Plan
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
2008
|
|
2009
|
|
|
2008
|
|
Service costbenefits earned during the period
|
|
$
|
1,017
|
|
|
$
|
636
|
|
|
$
|
59
|
|
$
|
188
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost on projected benefit obligation
|
|
|
1,695
|
|
|
|
817
|
|
|
|
176
|
|
|
95
|
|
|
5
|
|
|
|
5
|
|
Expected return on plan assets
|
|
|
(2,354
|
)
|
|
|
(1,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amortization and deferral of loss (gain)
|
|
|
508
|
|
|
|
238
|
|
|
|
163
|
|
|
106
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost included in employee benefits expense
|
|
$
|
866
|
|
|
$
|
474
|
|
|
$
|
398
|
|
$
|
389
|
|
$
|
5
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The minimum required contribution in 2009 for the qualified plan is estimated to be zero. The decision to
contribute further amounts is dependent on other factors, including the actual investment performance of the plan assets and the requirements of the Internal Revenue Code. No contributions were made during the first quarter of 2009. The Corporation
continues to monitor the funding level of the pension plan and may make additional contributions as deemed necessary.
For the unfunded non-qualified
pension and postretirement benefit plans, the Corporation will contribute the minimum required amount in 2009, which is equal to the benefits paid under the plans.
NOTE 18BUSINESS SEGMENT INFORMATION
The Corporations lines of business are structured according to the channels through which
its products and services are delivered to its customers. For management purposes the lines are divided into the following segments: Consumer Banking, Commercial Banking, and Treasury and Administration.
The Corporation offers consumer and commercial banking products and services through its wholly owned subsidiary, Provident Bank. The Bank offers its services to
customers in the key metropolitan areas of Baltimore, Washington D.C. and Richmond, Virginia, through 78 traditional and 63 in-store banking offices in Maryland, Virginia and southern York County, Pennsylvania. Additionally, the Bank offers its
customers 24-hour banking services through 196 Bank owned ATMs, telephone banking and the Internet. The Bank is also a member of the MoneyPass network, which provides customers with free access to more than 12,000 ATMs nationwide. Consumer banking
services include a broad array of small business and consumer loan, deposit and investment products offered to retail and commercial customers through the retail branch network and direct channel sales center. Commercial Banking provides an array of
commercial financial services including asset-based lending, equipment leasing, real estate financing, cash management and structured financing to middle market commercial customers. Treasury and Administration is comprised of balance sheet
management activities that include managing the investment portfolio, discretionary funding, utilization of derivative financial instruments and optimizing the Corporations equity position.
The financial performance of each business segment is monitored using an internal profitability measurement system. This system utilizes policies that ensure the results
reflect the economics for each segment compiled on a consistent basis. Line of business information is based on management accounting practices that support the current management structure and is not necessarily comparable with similar information
for other financial institutions. This profitability measurement system uses internal management accounting policies that generally follow the policies described in Note 1 of the Corporations December 31, 2008 10-K. The Corporations
funds transfer pricing system utilizes a matched maturity methodology that assigns a cost of funds to earning assets and a value to the liabilities of each business segment with an offset in the Treasury and Administration business segment. The
provision for loan losses is charged to the consumer and commercial segments based on actual charge-offs with the balance to the Treasury and Administration segment. Operating expense is charged on a fully absorbed basis. Income tax expense is
calculated based on the segments taxable income and the Corporations effective tax rate. Revenues from no individual customer exceeded 10% of consolidated total revenues.
31
The table below summarizes results by each business segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
Commercial
Banking
|
|
Consumer
Banking
|
|
|
Treasury and
Administration
|
|
|
Total
|
|
|
Commercial
Banking
|
|
Consumer
Banking
|
|
Treasury and
Administration
|
|
|
Total
|
|
Net interest income
|
|
$
|
14,589
|
|
$
|
21,731
|
|
|
$
|
(1,340
|
)
|
|
$
|
34,980
|
|
|
$
|
17,478
|
|
$
|
22,498
|
|
$
|
5,013
|
|
|
$
|
44,989
|
|
Provision for loan losses
|
|
|
9,156
|
|
|
3,599
|
|
|
|
22,855
|
|
|
|
35,610
|
|
|
|
2,060
|
|
|
879
|
|
|
175
|
|
|
|
3,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan losses
|
|
|
5,433
|
|
|
18,132
|
|
|
|
(24,195
|
)
|
|
|
(630
|
)
|
|
|
15,418
|
|
|
21,619
|
|
|
4,838
|
|
|
|
41,875
|
|
Non-interest income (loss)
|
|
|
4,685
|
|
|
18,358
|
|
|
|
(86,089
|
)
|
|
|
(63,046
|
)
|
|
|
5,021
|
|
|
22,851
|
|
|
(42,996
|
)
|
|
|
(15,124
|
)
|
Non-interest expense
|
|
|
8,298
|
|
|
38,655
|
|
|
|
10,371
|
|
|
|
57,324
|
|
|
|
6,314
|
|
|
37,226
|
|
|
7,891
|
|
|
|
51,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,820
|
|
|
(2,165
|
)
|
|
|
(120,655
|
)
|
|
|
(121,000
|
)
|
|
|
14,125
|
|
|
7,244
|
|
|
(46,049
|
)
|
|
|
(24,680
|
)
|
Income tax expense (benefit)
|
|
|
809
|
|
|
(962
|
)
|
|
|
(53,631
|
)
|
|
|
(53,784
|
)
|
|
|
4,040
|
|
|
2,072
|
|
|
(13,170
|
)
|
|
|
(7,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,011
|
|
$
|
(1,203
|
)
|
|
$
|
(67,024
|
)
|
|
$
|
(67,216
|
)
|
|
$
|
10,085
|
|
$
|
5,172
|
|
$
|
(32,879
|
)
|
|
$
|
(17,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,487,652
|
|
$
|
3,219,985
|
|
|
$
|
743,917
|
|
|
$
|
6,451,554
|
|
|
$
|
2,426,244
|
|
$
|
3,027,399
|
|
$
|
950,273
|
|
|
$
|
6,403,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 19AGREEMENT AND PLAN OF MERGER
On December 18, 2008, the Corporation entered into a definitive Agreement and Plan of Merger (the Merger Agreement) with M&T Bank Corporation (M&T), a New York corporation.
Pursuant to the Merger Agreement, M&T will acquire the Corporation in a stock-for-stock merger transaction valued at approximately $401 million, based on M&Ts closing price on December 16, 2008.
The Merger Agreement provides that, as promptly as reasonably practicable after signing the Merger Agreement, M&T will cause a corporation (Merger Sub)
to be formed in Maryland as a wholly-owned subsidiary of M&T, and M&T will cause Merger Sub to become a party to the Merger Agreement. The Merger Agreement provides that the Corporation will be merged with and into Merger Sub (the
Merger), with Merger Sub continuing as the surviving corporation and a wholly-owned subsidiary of M&T. Immediately following the Merger, the Corporations subsidiary Provident Bank of Maryland would also be merged with and into
M&Ts subsidiary M&T Bank.
The Merger Agreement has been approved by the boards directors of the Corporation and M&T. The common
stockholders of the Corporation approved the merger on April 8, 2009. Regulatory approval was received on May 8, 2009. The merger is still subject to customary closing conditions and the Corporation anticipates completing the transaction
on May 22, 2009.
In connection with the Merger, the Corporations common stockholders will receive 0.171625 shares of M&T common stock for each
share of the Corporations common stock held by them, which represents approximately $10.50 per share of the Corporations common stock, based on M&Ts closing price on December 16, 2008. Aggregate consideration for the
outstanding Provident common stock is comprised of approximately 5.75 million shares of M&T common stock, subject to adjustment, and is based on approximately 33.5 million shares of the Corporations common stock currently
outstanding.
M&T will issue shares in new series of preferred stock, to be respectively designated prior to the effectiveness of the Merger as
Mandatory Convertible Non-Cumulative Preferred Stock and Fixed Rate Cumulative Perpetual Preferred Stock in exchange for the shares of Series A Mandatory Convertible Non-Cumulative Preferred Stock (Provident Series A Stock) and Fixed
Rate Cumulative Perpetual Preferred Stock, Series B (Provident Series B Stock) held by the Corporations preferred stockholders. The terms and conditions of the two new series of M&T preferred stock will be substantially the
same as those of the Corporations Series A Stock and the Provident Series B Stock, respectively.
The Corporations outstanding options will
vest and be converted into options to purchase M&T common stock, based on the exchange ratio applied to the Corporations common stock.
The
Merger Agreement provides certain termination rights for both the Corporation and M&T, and further provides that upon termination of the Merger Agreement under certain circumstances, the Corporation will be obligated to pay M&T a termination
fee of $15.8 million.
32
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
GENERAL
Provident Bankshares Corporation (the Corporation), a Maryland corporation, is the bank holding
company for Provident Bank (Provident or the Bank), a Maryland chartered stock commercial bank. At March 31, 2009, the Bank is the largest independent commercial bank (based on the FDIC market share report) in asset size
headquartered in Maryland, with $6.5 billion in assets. Provident is a regional bank serving Maryland and Virginia, with emphasis on the key urban centers serving the Baltimore, Washington, D.C. and Richmond metropolitan areas.
Providents principal business is to acquire deposits from individuals and businesses and to use these deposits to fund loans to individuals and businesses.
Provident also offers related financial services through wholly owned subsidiaries. Securities brokerage, investment management and related insurance services are available through Provident Investment Company and leases through Court Square
Leasing.
Agreement and Plan of Merger
For discussion
relating to the definitive Agreement and Plan of Merger, refer to Note 19 in the Condensed Consolidated Financial Statements.
Business Strategy
Providents mission is to exceed customer expectations by delivering superior service, products and banking convenience. Every employees
commitment to serve the Banks customers in this fashion will assist in establishing Provident as the primary bank of choice of individuals, families, small businesses and middle market businesses throughout its chosen markets. To achieve this
mission and to improve financial fundamentals, the strategic priorities of the organization are to:
Maximize Providents position
as the right size bank in the marketplace.
Providents position as the largest bank headquartered in Maryland provides a unique opportunity as the right size bank in its market areas, or footprint. The Bank provides the service
of a community bank combined with the convenience and wide array of products and services that a major regional bank offers. In addition, the 63 in-store banking offices throughout its footprint reinforce its right size strategy through convenient
locations, hours and a full line of products and services. Provident currently has 141 banking offices concentrated in the Baltimore-Washington, D.C. corridor and beyond to Richmond, Virginia. Of the 141 banking offices, 49.6% are located in the
Greater Baltimore region and 50.4% are located in the Greater Washington, D.C. and Central Virginia regions, reflecting the successful development of the Bank into a highly competitive regional commercial bank. Provident also offers its customers
24-hour banking services through ATMs, telephone banking and the Internet. The Banks network of 194 ATMs enhances the banking office network by providing customers increased opportunities to access their funds. In addition, the Bank is a
member of the MoneyPass network, which provides free access to more than 12,000 ATMs nationwide for its customers.
Profitably grow and
deepen customer relationships in all four key market segments: Commercial, Commercial Real Estate, Consumer and Business Banking.
Consumer banking continues to be an important component of the Banks strategic priorities. Consumer banking
services include a broad array of consumer loan, lease, deposit and investment products offered to consumer and commercial customers through Providents banking office network and ProvidentDirect, the Banks direct channel sales center.
The business banking market segment is supported by relationship managers who provide comprehensive business product and sales support to expand existing customer relationships and acquire new clients. Commercial banking is the other key component
to the Corporations regional presence in its market area. Commercial Banking provides lending services through its commercial business division and its commercial real estate division. The commercial business division provides customized
banking solutions to middle market commercial customers while the commercial real estate division provides lending expertise and financing options to real estate customers. The Bank has an experienced team of relationship managers with expertise in
business and real estate lending to companies in various industries in the region. It also has a suite of cash management products managed by responsive account teams that deepen customer relationships through competitively priced deposit based
services, responsive service and frequent personal contact with each customer.
Consistently execute a higher-performance, customer
relationship-focused sales culture.
The Corporations transition to a customer relationship driven sales culture requires deepening relationships through cross-selling and the continuing emphasis on retention of valued customers. The Bank
has segmented its customers to better understand and anticipate their financial needs and provide Providents sales force with a targeted approach to customers and prospects. The successful execution of this strategic priority is centered on
the right size bank commitmentproviding the service of a community bank combined with the convenience and wide array of products and services that a major regional bank offers. This strategy is measured and monitored by a number of actions
such as the utilization of individual performance plans and sales goals.
33
Sustain a culture that attracts and retains employees who provide the differentiating Provident
Way customer experience.
Provident has always placed a high priority on its employees and has approached employee development and training with renewed emphasis. Employee development is viewed as a critical part of executing
Providents strategic priority as the right size bank and transforming the Corporations sales culture with a focus on the employees development and approach with Providents customers. This strategy is measured and monitored by
a number of actions, such as utilization of individual development plans for every employee and tracking individual employee learning activities through our learning management system.
Expand delivery (branch and non-branch) within the market Provident serves.
Over the past five years, Provident has expanded its branch network by
net 23 in-store or traditional branches.
FINANCIAL REVIEW
The principal objective of this Financial Review is to provide an overview of the financial condition and results of operations of Provident Bankshares Corporation and its subsidiaries year over year, unless otherwise indicated. This
discussion and tabular presentations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and Notes.
Overview of Income and Expenses
Income
The Corporation has two primary sources of pre-tax income. The first is net interest income. Net interest income is the difference between interest incomewhich is the income that the Corporation earns on its loans and
investmentsand interest expensewhich is the interest that is paid on its deposits and borrowings.
The second principal source of pre-tax
income is non-interest incomethe compensation received from providing products and services. The majority of the non-interest income comes from service charges on deposit accounts. The Corporation also earns income from insurance commissions,
mortgage banking fees and other fees and charges.
The Corporation recognizes gains or losses as a result of sales of investment securities or the
disposition of loans, foreclosed property or fixed assets. In addition, the Corporation also recognizes gains or losses on its outstanding derivative financial instruments and impairment on investment securities that are considered
other-than-temporarily impaired. Gains and losses are not a regular part of the Corporations primary source of income.
Expenses
The expenses the Corporation incurs in operating its business consist of salaries and employee benefits expense, occupancy expense, furniture and
equipment expense, external processing fees, deposit insurance premiums, advertising expenses, and other miscellaneous expenses.
Salaries and benefits
expense consists primarily of the salaries and wages paid to employees, payroll taxes and expenses for health care, retirement and other employee benefits.
Occupancy expense, which are fixed or variable costs associated with building and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance and cost of utilities.
Furniture and equipment expenses and depreciation charges relate to office and banking equipment. Depreciation of premises and equipment is computed using the
straight-line method based on the useful lives of related assets. Estimated lives range from 2 to 15 years for buildings and improvements, and 3 to 10 years for furniture and equipment.
External processing fees are fees paid to third parties for data processing services.
Merger related expenses consist of
investment banker fees, legal fees, conversion costs and employees benefit costs agreed to in the Merger Agreement.
Restructuring activities are
incremental expenses associated with corporate efficiency and infrastructure initiatives implemented to simplify the Corporations business model as described in the Notes to the Condensed Consolidated Financial Statements.
Other expenses include expenses for attorneys, accountants and consultants, fees paid to directors, franchise taxes, charitable contributions, insurance, office
supplies, postage, telephone and other miscellaneous operating expenses.
34
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The unaudited Condensed Consolidated Financial Statements of the Corporation are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial
statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities for the reporting periods. Management
evaluates estimates on an on-going basis, and believes the following represent its more significant judgments and estimates used in preparation of its consolidated financial statements: allowance for loan losses, non-accrual loans, other real estate
owned, estimates of fair value associated with other-than-temporary impairment, pension and post-retirement benefits, asset prepayment rates, goodwill and intangible assets, share-based payments, derivative financial instruments, litigation and
income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Management believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of its unaudited Condensed
Consolidated Financial Statements: allowance for loan losses, fair value, other-than-temporary-impairment of investment securities, derivative financial instruments, goodwill and intangible assets, and income taxes. Each estimate and its financial
impact, to the extent significant to financial results, are discussed in the Notes to the Condensed Consolidated Financial Statements. It is at least reasonably possible that each of the Corporations estimates could change in the near term or
that actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could be material to the Condensed Consolidated Financial Statements.
FINANCIAL CONDITION
Capital growth, liquidity along with maintaining
a strong balance sheet in this current economic environment are the top priorities of the Corporation. Over the past twelve months, the Corporation was successful in raising capital and maintaining solid capital ratios well above the minimum
regulatory capital levels along with increasing the Corporations liquidity position. In addition, the financial condition of the Corporation reflects expanded business development and the execution of the Corporations strategic
priorities including growing loans and deposits. Growth in relationship-based loan portfolios (loans other than the Corporations originated and acquired residential mortgage loans) is a reflection of the Corporations ability to grow the
loan portfolio in the key major markets of Greater Baltimore, Greater Washington, D.C. and Central Virginia through its lending expertise and focus on its premier loan programs home equity, commercial real estate, and commercial business. The
Corporation was also successful in growing customer deposits over the same period a year ago.
Over the past twelve months, the Corporation has increased
its liquidity position and reduced its reliance on short-term borrowings by increasing its brokered certificates of deposit balances. Loan credit quality has declined over this time frame and is primarily related to the weakness in the residential
construction industry. In addition, values of investment securities have continued to be negatively impacted by the economic down turn and turmoil in the financial markets.
The core banking performance has resulted in an increase in average relationship-based loans of $160.1 million, or 4.1%, and an increase in customer deposits of $236.6 million, or 7.0%, for the quarter ended
March 31, 2009, when compared to the same period a year ago. At March 31, 2009, total assets were $6.5 billion, while total loans and deposits were $4.3 billion and $4.8 billion, respectively.
Stockholders Equity and Capital
Over the past twelve months,
long-term capital growth has been a specific focus for the Corporation. To provide capital growth, the Corporation successfully completed a multi-tiered capital plan in April 2008 to strengthen the Corporations capital base, including the
issuance of $64.8 million in equity securities and $50 million in subordinated debt. In addition, beginning with the dividend that was paid in May 2008, the quarterly dividend payment was reduced by approximately 66%.
On April 9, 2008, the Corporation entered into a Stock Purchase Agreement (the Agreement) with certain institutional and individual accredited investors
and certain officers of the Corporation and members of the Corporations Board of Directors in connection with the private placement of $64.8 million of its capital stock. The Agreement provided for the sale of 1,422,110 shares of the
Corporations common stock at a price of $9.50 per share ($10.80 for officers and directors of the Corporation, which was the closing bid price on April 8, 2008, the date prior to the execution of the Agreement), and 51,215 shares of a
newly created class of Series A Mandatory Convertible Non-Cumulative Preferred Stock (the Provident Series A Preferred) at a purchase price and liquidation preference of $1,000 per share. The transaction closed on April 14,
2008. Net proceeds from the equity offering totaled $62.4 million and are included in Tier 1 capital.
35
On April 24, 2008, the Corporations wholly owned subsidiary, Provident Bank, completed a private placement of
$50.0 million of subordinated unsecured notes that are rated BBB to qualified institutional buyers and accredited investors. The purchase price of the subordinated notes was 97.651% of the principal amount. The notes are callable at the option of
the Corporation, five years from the date of issuance. The subordinated notes bear interest at a fixed rate of 9.5% and mature on May 1, 2018, with semi-annual interest payments payable on May 1 and November 1 of each year beginning
on November 1, 2008. The subordinated notes are not convertible. The net proceeds from the debt offering totaled $47.7 million and are included in Tier II regulatory capital.
On November 14, 2008, as part of the Troubled Asset Relief Program (TARP) Capital Purchase Program, the Corporation entered into a Purchase Agreement with the United States Department of the Treasury,
pursuant to which Provident sold 151,500 shares of Providents Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the Provident Series B Preferred) and a warrant to purchase 2,374,608 shares of the Corporations common
stock, par value $1.00 per share for an aggregate purchase price of $151.5 million in cash. The Provident Series B Preferred is included in Tier 1 capital. The stock warrants were issued with an initial exercise price of $9.57. The warrants have a
ten-year term and are exercisable immediately. If the Corporation raises common or perpetual preferred equity equal to or at least 100% of the senior preferred shares issued under TARP by December 31, 2009, the number of warrants will be
reduced by 50%.
Total stockholders equity was $609.1 million at March 31, 2009, a decrease of $62.0 million from December 31, 2008.
Stockholders equity decreased by $67.2 million as a result of the net loss recorded for the three months ended March 31, 2009. Stockholders equity was further reduced by the payments of common stock dividends of $3.7 million,
preferred stock dividends of $3.1 million and a $300 thousand decline related to share based payments and other activities. In addition, stockholders equity increased by $12.3 million due to the reduction in accumulated other comprehensive
loss during the period, primarily due to the write downs in the investment securities portfolio.
The Corporations tangible common equity ratio
decreased from 5.20% at December 31, 2008 to 4.19% at March 31, 2009. The decline is mainly associated with the $67.2 million net loss recorded in the first three months of 2009. The tangible common equity ratio is a non-GAAP measure used
by management to evaluate capital adequacy. Tangible common equity is total equity excluding net accumulated other comprehensive loss (OCI), less goodwill and deposit-based intangibles and preferred stock. Tangible assets are total
assets less goodwill and deposit-based intangibles. The tangible common equity ratio is calculated by removing the impact of OCI, preferred stock and certain intangible assets from total equity and total assets. Management and many stock analysts
use the tangible common equity ratio in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use
of the purchase accounting method accounting for mergers and acquisitions. Management believes this is an important benchmark for the Corporation and for investors. Neither tangible common equity, tangible assets nor the related measures should be
considered in isolation or as a substitute for stockholders equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and
the related measures may differ from that of other companies reporting measures with similar names. The following table is a reconciliation of the Corporations tangible common equity and tangible assets for the periods ended March 31,
2009, December 31, 2008 and March 31, 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
March 31,
2008
|
|
Total equity capital per consolidated financial statements
|
|
$
|
609,093
|
|
|
$
|
671,073
|
|
|
$
|
517,549
|
|
Accumulated other comprehensive loss
|
|
|
92,390
|
|
|
|
104,645
|
|
|
|
78,881
|
|
Goodwill
|
|
|
(255,330
|
)
|
|
|
(255,330
|
)
|
|
|
(253,906
|
)
|
Deposit-based intangible
|
|
|
(5,020
|
)
|
|
|
(4,886
|
)
|
|
|
(5,836
|
)
|
Preferred stock
|
|
|
(181,608
|
)
|
|
|
(187,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity
|
|
$
|
259,525
|
|
|
$
|
327,556
|
|
|
$
|
336,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets per consolidated financial statements
|
|
$
|
6,451,554
|
|
|
$
|
6,559,848
|
|
|
$
|
6,403,916
|
|
Goodwill
|
|
|
(255,330
|
)
|
|
|
(255,330
|
)
|
|
|
(253,906
|
)
|
Deposit-based intangible
|
|
|
(5,020
|
)
|
|
|
(4,886
|
)
|
|
|
(5,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
6,191,204
|
|
|
$
|
6,299,632
|
|
|
$
|
6,144,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity ratio
|
|
|
4.19
|
%
|
|
|
5.20
|
%
|
|
|
5.48
|
%
|
36
The Corporation is required to maintain minimum amounts and ratios of core capital to adjusted quarterly average assets
(leverage ratio) and of Tier 1 and total regulatory capital to risk-weighted assets. The actual regulatory capital ratios and required ratios for capital adequacy purposes under FIRREA and the ratios to be categorized as well
capitalized under prompt corrective action regulations are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
March 31,
2009
|
|
|
|
|
December 31,
2008
|
|
Total equity capital per consolidated financial statements
|
|
$
|
609,093
|
|
|
|
|
$
|
671,073
|
|
Qualifying trust preferred securities
|
|
|
129,000
|
|
|
|
|
|
129,000
|
|
Accumulated other comprehensive loss
|
|
|
92,390
|
|
|
|
|
|
104,645
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted capital
|
|
|
830,483
|
|
|
|
|
|
904,718
|
|
Adjustments for tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
Goodwill and disallowed assets
|
|
|
(372,508
|
)
|
|
|
|
|
(301,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tier 1 capital
|
|
|
457,975
|
|
|
|
|
|
603,630
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for tier 2 capital:
|
|
|
|
|
|
|
|
|
|
|
Includable allowance for loan losses
|
|
|
87,435
|
|
|
|
|
|
73,098
|
|
Subordinated debt
|
|
|
50,000
|
|
|
|
|
|
50,000
|
|
Allowance for letter of credit losses
|
|
|
649
|
|
|
|
|
|
701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tier 2 capital adjustments
|
|
|
138,084
|
|
|
|
|
|
123,799
|
|
|
|
|
|
|
|
|
|
|
|
|
Total regulatory capital
|
|
$
|
596,059
|
|
|
|
|
$
|
727,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
|
$
|
6,944,051
|
|
|
|
|
$
|
6,295,196
|
|
Quarterly regulatory average assets
|
|
|
6,240,228
|
|
|
|
|
|
6,248,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Regulatory
Requirements
|
|
|
To be Well
Capitalized
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage
|
|
|
|
7.34
|
%
|
|
9.66
|
%
|
|
|
|
4.00
|
%
|
|
5.00
|
%
|
Tier 1 capital to risk-weighted assets
|
|
|
|
6.60
|
|
|
9.59
|
|
|
|
|
4.00
|
|
|
6.00
|
|
Total regulatory capital to risk-weighted assets
|
|
|
|
8.58
|
|
|
11.56
|
|
|
|
|
8.00
|
|
|
10.00
|
|
As of March 31, 2009, the Corporation is considered adequately capitalized for regulatory
purposes. Refer to page 46 for the impact on total regulatory capital ratios if the Corporation early adopted FSP FAS 115-2 and 124-2, Recognition and Presentation of OtherThan-Temporary Impairments.
Liquidity
An important component of the Corporations
asset/liability management process is monitoring the level of liquidity available to meet the needs of customers and creditors. Traditional sources of bank liquidity include deposit growth, loan repayments, investment maturities, asset sales,
borrowings and interest received. Management believes the Corporation has sufficient liquidity to meet future funding needs.
The Corporations chief
source of liquidity is the assets it possesses, which can either be pledged as collateral for secured borrowings or sold outright. At March 31, 2009, approximately $327.4 million of the Corporations investment portfolio was immediately
saleable at a market value equaling or exceeding its amortized cost basis.
As an alternative to asset sales, the Corporation has the ability to pledge
assets to raise secured borrowings. At March 31, 2009, $781.8 million of secured wholesale borrowings were employed, with sufficient collateral available to raise an additional $921.5 million from the FHLBAtlanta, the Federal
Reserves term auction facility and securities sold under repurchase agreements. Additionally, over $367.3 million of borrowing capacity exists at the Federal Reserve discount window as a contingent funding source. The Corporation also employs
unsecured funding sources such as fed funds and brokered certificates of deposit. At March 31, 2009, no fed funds purchased were outstanding, with sufficient funding lines in place to purchase $641.0 million. At March 31, 2009, the
Corporation had $1.1 billion of brokered certificates of deposit outstanding. Over the next 12 months, $425.9 million of unsecured funds will mature.
In
November 2008, the Corporation issued $151.5 million of preferred equity securities to the U.S. Treasury the securities commonly known as TARP funding.
A significant use of the Corporations liquidity is the dividends it pays to shareholders. The Corporation is a one-bank holding company that relies upon the Banks performance to generate capital growth through Bank earnings. A
portion of the Banks earnings is passed to the Corporation in the form of cash dividends. As a commercial bank under the Maryland Financial
37
Institution Law, the Bank may declare cash dividends from undivided profits or, with the prior approval of the Commissioner of Financial Regulation, out of
paid-in capital in excess of 100% of its required capital stock, and after providing for due or accrued expenses, losses, interest and taxes. These dividends paid to the holding company are utilized to pay dividends to stockholders, repurchase
shares and pay interest on junior subordinated debentures. The Corporation and the Bank, in declaring and paying dividends, are also limited insofar as minimum capital requirements of regulatory authorities that must be maintained and by certain
provisions of the TARP Capital Purchase Program. The Corporation and the Bank comply with such capital requirements. If the Corporation or the Bank were unable to comply with the minimum capital requirements, it could result in regulatory actions
that could have a material impact on the Corporation. The Corporations ability to pay a dividend is also limited by the terms of the merger agreement which requires that the Corporation coordinate with M&T regarding the declaration of any
dividends or other distributions with respect to the Corporations common stock and the related record dates and payment dates, it being intended that, among other things, the holders of the Corporations common stock will not receive more
than one dividend for any single calendar quarter on their shares of Corporation common stock (including any shares of M&T common stock received in exchange therefore in the merger).
Lending
Total average loan balances increased to $4.3 billion in the first quarter of 2009, an increase of $117.1
million, or 2.8%, over the first quarter of 2008. The following table summarizes the composition of the Corporations average loans for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Three Months Ended
March 31,
|
|
$
Variance
|
|
|
%
Variance
|
|
|
|
|
|
2009
|
|
2008
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated and acquired residential mortgage
|
|
$
|
247,102
|
|
$
|
290,093
|
|
$
|
(42,991
|
)
|
|
(14.8
|
)%
|
Home equity
|
|
|
1,172,513
|
|
|
1,086,463
|
|
|
86,050
|
|
|
7.9
|
|
Other consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
|
335,673
|
|
|
357,963
|
|
|
(22,290
|
)
|
|
(6.2
|
)
|
Other
|
|
|
22,609
|
|
|
24,251
|
|
|
(1,642
|
)
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,777,897
|
|
|
1,758,770
|
|
|
19,127
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage
|
|
|
573,668
|
|
|
445,465
|
|
|
128,203
|
|
|
28.8
|
|
Residential construction
|
|
|
506,756
|
|
|
613,126
|
|
|
(106,370
|
)
|
|
(17.3
|
)
|
Commercial construction
|
|
|
491,623
|
|
|
475,882
|
|
|
15,741
|
|
|
3.3
|
|
Commercial business
|
|
|
997,376
|
|
|
936,933
|
|
|
60,443
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
2,569,423
|
|
|
2,471,406
|
|
|
98,017
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
4,347,320
|
|
$
|
4,230,176
|
|
$
|
117,144
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average loans increased $117.1 million, or 2.8%, in the first quarter of 2009 when compared to the same
period a year ago. The increase resulted from the $98.0 million, or 4.0%, increase in commercial loans and the $19.1 million, or 1.1%, increase in consumer loans. The Corporation continues to produce solid organic loan growth as average
relationship-based loans increased $160.1 million, or 4.1%, over the same period a year ago. The Corporations focus on business development and developing lending relationships that are provided by the market opportunities, combined with the
experience of lending officers in the market, has been demonstrated by the solid growth in commercial real estate and commercial business loans. Overall, there is a strategically balanced mix of lending revenue sources between the two product
segments with $2.5 billion, or 59.1%, in average commercial loans and $1.8 billion, or 40.9%, in average consumer loans. The diversity of lending products should provide the Corporation with opportunities to emphasize certain product lines as market
conditions change.
Commercial loans, which are a key component to the Corporations regional presence in its market area, grew $98.0 million, or
4.0%, over the same period a year ago. Commercial mortgage and commercial construction loans posted increases during the first quarter of 2009 of $128.2 million and $15.7 million, respectively, when compared to the same period a year ago. In
addition, commercial business loans grew $60.4 million, or 6.5%, while residential construction loans declined $106.4 million, or 17.3%. The solid commercial loan growth within the Corporations footprint is a reflection of the groups
ability to expand existing and generate new lending relationships. These expanded relationships and associated risks are managed through stringent loan administration and credit monitoring by an experienced credit management staff.
The increase in average consumer loans of $19.1 million in the first quarter of 2009 include the planned reductions in originated and acquired residential mortgages of
$43.0 million. Average relationship-based consumer loans (loans other than originated and acquired residential mortgages) increased 4.2%, or $62.1 million. Home equity lending is the main contributor to this loan growth. The variety of home equity
loan products, along with the Corporations relationship sales approach and competitive pricing has proven to be successful in the Corporations markets. This market strategy resulted in the $86.1 million, or 7.9%, increase in home equity
average balances. The production of direct consumer loans, primarily home equity loans and lines, are generated by the Banks retail banking offices, phone centers, the Internet and selected pre-qualified brokers. Other consumer loans, which
make up 20.2% of total consumer loans (mainly marine lending), declined $23.9 million in the first quarter of 2009. Management has chosen to limit marine lending loan growth due to low pricing margins in the industry.
38
The Corporations portfolio of originated and acquired residential mortgage loans (consisting of first mortgages,
home equity loans and lines) represented 5.7% of average total loans in the first quarter of 2009, compared to 6.9% in the same period a year ago. Average balances in the originated and acquired residential mortgage portfolio continued to decline
during the first quarter of 2009 because the Corporation is no longer active in portfolio acquisitions and the Bank retains only a small percentage of new residential mortgage loan originations.
Asset Quality
The following table presents information with respect
to non-performing assets and 90-day delinquencies as of the dates indicated.
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Non-Performing Assets:
|
|
|
|
|
|
|
|
|
Originated and acquired residential mortgage
|
|
$
|
11,734
|
|
|
$
|
10,017
|
|
Home equity
|
|
|
3,815
|
|
|
|
3,319
|
|
Other consumer
|
|
|
2,377
|
|
|
|
1,421
|
|
Commercial mortgage
|
|
|
6,926
|
|
|
|
7,079
|
|
Residential real estate construction
|
|
|
59,422
|
|
|
|
43,955
|
|
Commercial real estate construction
|
|
|
2,914
|
|
|
|
140
|
|
Commercial business
|
|
|
25,081
|
|
|
|
18,387
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
112,269
|
|
|
|
84,318
|
|
Total renegotiated loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
112,269
|
|
|
|
84,318
|
|
Non-performing investments
|
|
|
99,213
|
|
|
|
65,780
|
|
Total other assets and real estate owned
|
|
|
19,947
|
|
|
|
13,161
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
231,429
|
|
|
$
|
163,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90-Day Delinquencies:
|
|
|
|
|
|
|
|
|
Originated and acquired residential mortgage
|
|
$
|
3,857
|
|
|
$
|
5,079
|
|
Home equity
|
|
|
4,792
|
|
|
|
4,835
|
|
Other consumer
|
|
|
4,262
|
|
|
|
3,957
|
|
Residential real estate construction
|
|
|
|
|
|
|
15
|
|
Commercial business
|
|
|
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
Total 90-day delinquencies
|
|
$
|
12,911
|
|
|
$
|
14,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
Non-performing loans to loans
|
|
|
2.60
|
%
|
|
|
1.94
|
%
|
Non-performing investments to investments
|
|
|
7.83
|
%
|
|
|
4.79
|
%
|
Non-performing assets to assets
|
|
|
3.59
|
%
|
|
|
2.49
|
%
|
Allowance for loan losses to loans
|
|
|
2.21
|
%
|
|
|
1.68
|
%
|
Net charge-offs in quarter to average loans
|
|
|
1.26
|
%
|
|
|
0.75
|
%
|
Allowance for loan losses to non-performing loans
|
|
|
84.84
|
%
|
|
|
86.69
|
%
|
Recent economic data has shown that the Mid-Atlantic region, while outperforming most other markets in the nation,
is facing similar increasing economic pressures. In comparison to the quarter ending March 31, 2008, new housing inventories are down in both Maryland and Virginia. Unemployment levels in the region have increased, but still remain below the
national average. During the recent quarter ending March 31, 2009, the deterioration in economic conditions have had a significant impact on the Corporations loan portfolios resulting in increases in non-performing loans in each loan
portfolio type, except commercial mortgage loans. In addition, continued weakness in the financial services sector continues to have a material impact on the investment securities portfolio.
As of March 31, 2009, non-performing loans increased by $28.0 million from December 31, 2008. Non-performing loans as a percentage of total loans was 2.60% at
March 31, 2009 compared to 1.94% at December 31, 2008, while net charge-offs to average loans were 1.26%, an increase from 0.75% for the quarter ended December 31, 2008. The increase in non-performing loans occurred mainly in the
residential real estate construction, commercial real estate construction and commercial business loan portfolios totaling $15.5 million, $2.8 million and $6.7 million, respectively. The declining economy has resulted in significant increases in
these portfolios.
39
Non-performing loans as a percentage of each portfolios outstanding balance were as follows:
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Originated & acquired residential mortgage
|
|
4.84
|
%
|
|
4.01
|
%
|
Home equity
|
|
0.33
|
|
|
0.28
|
|
Other consumer
|
|
0.67
|
|
|
0.39
|
|
Total consumer
|
|
1.02
|
|
|
0.83
|
|
Commercial mortgage
|
|
1.21
|
|
|
1.25
|
|
Residential real estate construction
|
|
12.18
|
|
|
8.28
|
|
Commercial real estate construction
|
|
0.58
|
|
|
0.03
|
|
Commercial business
|
|
2.53
|
|
|
1.86
|
|
Total commercial
|
|
3.70
|
|
|
2.71
|
|
Total loans
|
|
2.60
|
|
|
1.94
|
|
Management believes that the diversification of the commercial real estate portfolio among commercial mortgages,
commercial construction and residential construction along with the different market conditions of Baltimore, suburban Washington, D.C. and Richmond, Virginia mitigate some of the housing market exposure. In addition, managements conservative
credit policies and emphasis on relationship-based loan portfolios also mitigates credit risk in the Corporations loan portfolio. Overall, loan credit quality ratios of the Corporation at March 31, 2009 have weakened and are consistent
with local economic conditions and non-performing loan levels will continue to be influenced by these uncertain future conditions. Loan credit quality remains better than the national average and reflects managements prudent credit standards,
disciplined in-house administration and strong oversight procedures. The majority of the portfolio benefits from being focused within the Washington D.C, Virginia and Maryland region which remains one of the better performing markets in the nation.
Because events affecting borrowers and collateral are constantly changing and cannot be reliably predicted, present portfolio quality may not be an indication of future performance.
At March 31, 2009, the allowance for loan losses to total loans was 2.21%, while the allowance for loan losses to non-performing loans was 84.8%. At
December 31, 2008 these ratios were 1.68% and 86.7%, respectively. The level of 90-day delinquent loans decreased during the same period, decreasing $1.6 million to $12.9 million from the $14.5 million level at December 31, 2008. The
decrease in 90-day delinquent loans was reflected mainly in the originated and acquired residential mortgage and commercial business loan portfolios.
During the first quarter of 2009, the Corporation had $99.2 million in investment securities classified as non-performing assets. Non-accrual treatment for the recognition of interest income has been applied because certain securities did
not perform in accordance with the agreed upon contractual terms, such as timely payment of principal or interest or deferral of their contractual payments. Also during the first quarter of 2009, other real estate owned increased by $6.8 million
over December 31, 2008.
Allowance for Loan Losses
The Corporation maintains an allowance for loan losses (the allowance), which is intended to be managements best estimate of probable inherent losses in the outstanding loan portfolio. The allowance is reduced by
charge-offs and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan losses are charges to earnings to bring the total allowance to a level considered necessary by management.
The allowance is based on managements continuing review and credit risk evaluation of the loan portfolio. This process provides an allowance consisting of two
components, allocated and unallocated. To arrive at the allocated component of the allowance, the Corporation combines estimates of the allowances needed for loans analyzed individually and on a pooled basis. The allocated component of the allowance
is supplemented by an unallocated component.
The portion of the allowance that is allocated to individual internally criticized and non-accrual loans is
determined by estimating the inherent loss on each problem credit after giving consideration to the value of underlying collateral. Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and
review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. The Corporations lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the
economy or in a borrowers circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of
uncollectibility. Each commercial loan is assigned a grade based upon an assessment of the borrowers financial capacity to service the debt and the presence and value of collateral for the loan.
40
In addition to being used to categorize risk, the Banks internal ten-point risk rating system is used to determine
the allocated allowance for the commercial portfolio. Reserve factors, based on the actual loss history for a 5-year period for criticized loans, are assigned. If the factor, based on loss history for classified credits is lower than the minimum
established factor, the higher factor is applied. For loans with satisfactory risk profiles, the factors are based on the rating profile of the portfolio and the consequent historic losses of bonds with equivalent ratings.
For the consumer portfolios, the determination of the allocated allowance is conducted at an aggregate, or pooled, level. Each quarter, historical rolling loss rates for
homogenous pools of loans in these portfolios provide the basis for the allocated reserve. For any portfolio where the Bank lacks sufficient historic experience, industry loss rates are used. If recent history is not deemed to reflect the inherent
losses existing within a portfolio, older historic loss rates during a period of similar economic or market conditions are used.
The Banks credit
administration group adjusts the indicated loss rates based on qualitative factors. Factors that are considered in adjusting loss rates include risk characteristics, credit concentration trends and general economic conditions, including job growth
and unemployment rates. For commercial and real estate portfolios, additional factors include the level and trend of watched and criticized credits within those portfolios; commercial real estate vacancy, absorption and rental rates; and the number
and volume of syndicated credits, construction loans, or other portfolio segments deemed to carry higher levels of risk. Upon completion of the qualitative adjustments, the overall allowance is allocated to the components of the portfolio based on
the adjusted loss factors.
The unallocated component of the allowance exists to mitigate the imprecision inherent in managements estimates of
expected credit losses and includes its judgmental determination of the amounts necessary for concentrations, economic uncertainties and other subjective factors that may not have been fully considered in the allocated allowance. The relationship of
the unallocated component to the total allowance may fluctuate from period to period. Although management has allocated the majority of the allowance to specific loan categories, the evaluation of the allowance is considered in its entirety.
Lending management meets at least quarterly with executive management to review the credit quality of the loan portfolios and to evaluate the allowance.
The Corporation has an internal risk analysis and review staff that continuously reviews loan quality and reports the results of its reviews to executive management and the Board of Directors. Such reviews also assist management in establishing the
level of the allowance.
Management believes that it uses relevant information available to make determinations about the allowance and that it has
established its existing allowance in accordance with GAAP. If circumstances differ substantially from the assumptions used in making determinations, adjustments to the allowance may be necessary and results of operations could be affected. Because
events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate.
The FDIC examines the Bank periodically and, accordingly, as part of this examination, the allowance is reviewed for adequacy utilizing specific guidelines. Based upon
their review, the regulators may from time to time require reserves in addition to those previously provided.
At March 31, 2009, the allowance for
loan losses was $95.3 million, or 2.21% of total loans outstanding, compared to an allowance for loan losses at December 31, 2008 of $73.1 million, or 1.68% of total loans outstanding. The allowance coverage was 84.8% of non-performing loans at
March 31, 2009 compared to 86.7% at December 31, 2008. Portfolio-wide, net charge-offs represented 1.26% of average loans in the first quarter of 2009, compared to 0.30% in the first quarter of 2008 and 0.75% in the fourth quarter of 2008.
41
Deposits
The
following table summarizes the composition of the Corporations average deposit balances for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Three Months Ended
March 31,
|
|
$
Variance
|
|
|
%
Variance
|
|
|
|
|
|
2009
|
|
2008
|
|
|
Transaction accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
659,644
|
|
$
|
643,161
|
|
$
|
16,483
|
|
|
2.6
|
%
|
Interest-bearing
|
|
|
451,186
|
|
|
458,059
|
|
|
(6,873
|
)
|
|
(1.5
|
)
|
Savings/money market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
609,634
|
|
|
518,370
|
|
|
91,264
|
|
|
17.6
|
|
Money market
|
|
|
661,403
|
|
|
653,693
|
|
|
7,710
|
|
|
1.2
|
|
Certificates of deposit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
1,213,271
|
|
|
1,085,293
|
|
|
127,978
|
|
|
11.8
|
|
Brokered
|
|
|
1,168,977
|
|
|
874,172
|
|
|
294,805
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
4,764,115
|
|
$
|
4,232,748
|
|
$
|
531,367
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits by source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
$
|
2,794,912
|
|
$
|
2,666,964
|
|
$
|
127,948
|
|
|
4.8
|
|
Commercial
|
|
|
800,226
|
|
|
691,612
|
|
|
108,614
|
|
|
15.7
|
|
Brokered
|
|
|
1,168,977
|
|
|
874,172
|
|
|
294,805
|
|
|
33.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
4,764,115
|
|
$
|
4,232,748
|
|
$
|
531,367
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total deposits increased to $4.8 billion in the first quarter of 2009, an increase of $531.4 million, or
12.6%, over the same period in 2008. The deposit growth resulted from an increase in brokered deposits of $294.8 million and increases in consumer and commercial deposits of $127.9 million and $108.6 million, respectively. The increase in brokered
certificates of deposit provided funding for loan growth, consistent with the strategic objective of lengthening the maturity of liabilities to enhance the Corporations longer-term liquidity position.
In the first quarter of 2009, average consumer deposits increased by $127.9 million, or 4.8%. Consumer savings deposits increased $91.9 million and consumer certificates
of deposit increased $51.1 million, offset by a $15.1 million decline in all other sources of consumer deposits. The growth in consumer savings deposit balances is mainly due to the successful efforts in growing online savings balances, which
increased $112.9 million over the same period a year ago.
Average commercial deposits also increased in the first quarter of 2009 compared to the same
period a year ago, increasing $108.6 million, or 15.7%. During the first quarter of 2009, commercial certificates of deposit increased $76.8 million, commercial money market accounts increased $19.8 million and non-interest bearing deposits $17.4
million, offset by a $5.4 million decline in all other sources of commercial deposits.
Treasury Activities
The Treasury Division manages the wholesale segments of the balance sheet, including investments, purchased funds, long-term debt and derivatives. Managements
objective is to achieve the maximum level of stable earnings over the long term, while controlling the level of interest rate, credit risk and liquidity risk, and optimizing capital utilization. In managing the investment portfolio to achieve its
stated objective, the Corporation invests predominately in U.S. Treasury and Agency securities, mortgage-backed securities (MBS), asset-backed securities (ABS), including trust preferred securities, corporate bonds and
municipal bonds. Treasury strategies and activities are overseen by the Banks Asset / Liability Committee (the ALCO), which also reviews all investment and funding transactions. ALCO activities are summarized and reviewed monthly
with the Corporations Board of Directors.
42
Investments
At
March 31, 2009, the investment securities portfolio totaled $1.3 billion, or 19.7% of total assets, compared to 21.0% of total assets at year-end 2008. The portfolio declined $106.9 million from the level at year-end 2008, primarily from
write-downs recorded in 2009 associated with securities that were other-than-temporarily impaired and from the decline in market values in the investment portfolio. Management wrote-down the value of investment securities by $87.4 million for the
quarter ended March 31, 2009 due to other-than-temporary impairment of its non-agency mortgage backed securities, REIT pooled trust preferred securities and bank pooled trust preferred securities portfolios. The REIT pooled trust preferred
securities were written down by $1.5 million, the non-agency MBS were written down by $16.6 million, and the bank pooled trust preferred stocks were written down by $69.3 million. Additional activity included, principally, $35.2 million of MBS
prepayments, $4.0 million of U.S. Treasury security maturities, and a $19.3 million increase in the market value of the agency MBS portfolio.
43
Investment Portfolio Credit Quality
Investment allocations at March 31, 2009 include agency MBS (56.7%), ABS (15.8%), municipal 13.4%), corporate (5.4%), non-agency MBS (4.3%) and U.S. Government securities (4.4%). The charts below summarize
the credit quality of the Corporations investment portfolio, using the lowest of the current ratings of Moodys, Standard and Poors, or Fitch Ratings and the portfolio distribution.
Investment Securities Portfolio
March 31, 2009
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par
Value
|
|
%
|
|
|
Fair
Value
|
|
%
|
|
|
Amortized
Cost
|
|
%
|
|
Treasuries
|
|
$
|
13,000
|
|
0.8
|
%
|
|
$
|
12,994
|
|
1.1
|
%
|
|
$
|
12,977
|
|
1.0
|
%
|
|
|
|
|
|
|
|
Sovereign
|
|
|
400
|
|
|
|
|
|
400
|
|
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
FHLB Stock
|
|
|
38,114
|
|
2.3
|
|
|
|
38,114
|
|
3.3
|
|
|
|
38,114
|
|
2.8
|
|
|
|
|
|
|
|
|
Agency MBS/ARM
|
|
|
631,728
|
|
38.3
|
|
|
|
654,736
|
|
56.7
|
|
|
|
637,748
|
|
47.2
|
|
|
|
|
|
|
|
|
Municipals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
18,430
|
|
1.1
|
|
|
|
19,074
|
|
1.7
|
|
|
|
18,467
|
|
1.4
|
|
AA
|
|
|
88,594
|
|
5.4
|
|
|
|
91,007
|
|
7.9
|
|
|
|
88,964
|
|
6.6
|
|
A
|
|
|
31,201
|
|
1.9
|
|
|
|
31,826
|
|
2.8
|
|
|
|
31,332
|
|
2.3
|
|
BBB
|
|
|
11,325
|
|
0.7
|
|
|
|
11,675
|
|
1.0
|
|
|
|
11,383
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Municipals
|
|
|
149,550
|
|
9.1
|
|
|
|
153,582
|
|
13.4
|
|
|
|
150,146
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank pooled trust preferred securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB
|
|
|
13,374
|
|
0.8
|
|
|
|
7,826
|
|
0.7
|
|
|
|
13,192
|
|
1.0
|
|
BB
|
|
|
13,378
|
|
0.8
|
|
|
|
6,349
|
|
0.5
|
|
|
|
13,322
|
|
1.0
|
|
B
|
|
|
41,150
|
|
2.5
|
|
|
|
17,718
|
|
1.5
|
|
|
|
40,607
|
|
3.0
|
|
CCC
|
|
|
339,813
|
|
20.5
|
|
|
|
103,044
|
|
9.0
|
|
|
|
196,736
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bank pooled trust preferred securities
|
|
|
407,715
|
|
24.6
|
|
|
|
134,937
|
|
11.7
|
|
|
|
263,857
|
|
19.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance pooled trust preferred securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
15,995
|
|
1.0
|
|
|
|
10,681
|
|
0.9
|
|
|
|
15,995
|
|
1.2
|
|
AA
|
|
|
13,152
|
|
0.8
|
|
|
|
7,102
|
|
0.6
|
|
|
|
13,152
|
|
1.0
|
|
A
|
|
|
24,512
|
|
1.5
|
|
|
|
10,659
|
|
0.9
|
|
|
|
24,515
|
|
1.8
|
|
BBB
|
|
|
17,500
|
|
1.1
|
|
|
|
9,163
|
|
0.8
|
|
|
|
17,500
|
|
1.3
|
|
B
|
|
|
1,000
|
|
0.1
|
|
|
|
418
|
|
|
|
|
|
1,000
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance pooled trust preferred securities
|
|
|
72,159
|
|
4.5
|
|
|
|
38,023
|
|
3.2
|
|
|
|
72,162
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REIT pooled trust preferred securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B
|
|
|
5,000
|
|
0.3
|
|
|
|
1,065
|
|
0.1
|
|
|
|
1,065
|
|
0.1
|
|
CCC
|
|
|
102,114
|
|
6.2
|
|
|
|
9,542
|
|
0.8
|
|
|
|
18,059
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total REIT pooled trust preferred securities
|
|
|
107,114
|
|
6.5
|
|
|
|
10,607
|
|
0.9
|
|
|
|
19,124
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
33,848
|
|
2.1
|
|
|
|
26,074
|
|
2.3
|
|
|
|
27,417
|
|
2.0
|
|
AA
|
|
|
5,846
|
|
0.4
|
|
|
|
705
|
|
0.1
|
|
|
|
705
|
|
0.1
|
|
A
|
|
|
27,716
|
|
1.7
|
|
|
|
9,322
|
|
0.8
|
|
|
|
9,322
|
|
0.7
|
|
BBB
|
|
|
4,845
|
|
0.3
|
|
|
|
3,457
|
|
0.3
|
|
|
|
4,845
|
|
0.4
|
|
BB
|
|
|
3,902
|
|
0.2
|
|
|
|
1,160
|
|
0.1
|
|
|
|
1,160
|
|
0.1
|
|
B
|
|
|
9,171
|
|
0.6
|
|
|
|
5,077
|
|
0.4
|
|
|
|
5,077
|
|
0.4
|
|
CCC
|
|
|
37,002
|
|
2.2
|
|
|
|
3,729
|
|
0.3
|
|
|
|
3,729
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-agency MBS
|
|
|
122,330
|
|
7.5
|
|
|
|
49,524
|
|
4.3
|
|
|
|
52,255
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
5,225
|
|
0.3
|
|
|
|
6,015
|
|
0.5
|
|
|
|
5,225
|
|
0.4
|
|
A
|
|
|
8,998
|
|
0.5
|
|
|
|
6,034
|
|
0.5
|
|
|
|
8,673
|
|
0.6
|
|
BBB
|
|
|
53,350
|
|
3.2
|
|
|
|
30,082
|
|
2.6
|
|
|
|
51,501
|
|
3.8
|
|
BB
|
|
|
35,503
|
|
2.2
|
|
|
|
17,069
|
|
1.6
|
|
|
|
34,744
|
|
2.5
|
|
NR
|
|
|
3,200
|
|
0.2
|
|
|
|
2,454
|
|
0.2
|
|
|
|
3,131
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate securities
|
|
|
106,276
|
|
6.4
|
|
|
|
61,654
|
|
5.4
|
|
|
|
103,274
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Portfolio
|
|
$
|
1,648,386
|
|
100.0
|
%
|
|
$
|
1,154,571
|
|
100.0
|
%
|
|
$
|
1,350,057
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Investment securities are evaluated quarterly to determine whether a decline in their value is other-than-temporary.
Considerations such as the Corporations intent and ability to hold securities, recoverability of invested amount over the Corporations intended holding period and receipt of amounts contractually due, for example, are applied in
determining whether the value of a security is other-than-temporarily impaired (OTTI). The Corporation reviews all investment securities with unrealized losses to determine the duration and severity of the price declines. Management
evaluates all structured securities for OTTI, regardless of duration and severity of market erosion, while all other securities are evaluated for OTTI based on the severity and duration of each securitys market value erosion. Investment
securities with a market to book ratio of less than 80% or lasting 12 months or more receive greater scrutiny from management. Once a decline in value is determined to be otherthan-temporary, the value of the security is reduced and a
corresponding charge to earnings is recognized in the Condensed Consolidated Statements of Operations.
For the quarter ended March 31, 2009, the
Corporation determined certain securities to be OTTI, and accordingly, recognized an $87.4 million write-down of the securities portfolio. The write-down was determined based on the individual securities credit performance and its ability to
make its future contractual principal and interest payments. Should credit quality of certain securities continue to deteriorate, it is possible that additional write-downs may be required. If economic conditions continue to deteriorate, securities
that are currently performing satisfactorily could possibly suffer impairment and could potentially require write-downs. The entire securities portfolio is evaluated each quarter to determine if additional write-downs are warranted.
As of March 31, 2009, the investment securities portfolio contained $427.1 million (face value) of securities with unrealized losses for 12 months or greater having
an aggregate loss of $243.1 million. Of the total face value, $10.7 million consists of U.S. agency backed MBS with a loss of $2.5 million and $67.3 million consists of corporate securities with an aggregate loss of $28.6 million. The remaining
$348.6 million, with an aggregate loss of $211.9 million, consists almost entirely of bank and insurance pooled trust preferred securities. Each of these securities was tested for credit-based price declines. Securities failing the cash flow
projection test were determined to be OTTI and written-down accordingly. Securities with particularly low prices were stress tested to determine if their credit quality remains sound. In managements judgment, securities with sound credit
quality are not being written-down based solely on the severity or duration of their price declines at this time, due to the extreme illiquidity evident in their respective markets and the uncertainty surrounding the impact of the U.S. Treasury
Departments TARP program. For further discussion on OTTI, refer to Note 3 of the Corporations Condensed Consolidated Financial Statements.
As
of March 31, 2009, the Corporations investment portfolio had unrealized losses of $195.5 million, or 14.5%, down from $199.6 million, or 13.7% at December 31, 2008. The loss position stems primarily from deterioration in the market
valuations of pooled trust preferred securities and non-agency MBS. The pricing for these securities has been distressed by the mortgage foreclosure crisis affecting mortgage-backed securities and the ensuing liquidity crisis affecting asset-backed
securities markets. The Corporation continually evaluates the credit quality and market pricing of the securities portfolio. Based upon these and other factors, the securities portfolio may experience further impairment. At March 31, 2009,
management has the intent and ability to retain investment securities with unrealized losses until the decline in value has been recovered.
The $704.3
million MBS portfolio includes $654.7 million of agency-backed securities, $40.2 million of senior non-agency MBS securities originally rated AAA, and $9.3 million of mezzanine non-agency MBS securities originally rated AA. There are sixteen
mezzanine level securities and ten senior level securities with a current market value of $35.9 million that have been categorized as OTTI. The non-agency MBS securities have been written down to $35.9 million from a par value of $106.1 million. On
average, the OTTI securities experienced 60 day+ delinquencies of 9.15% at March 31, 2009. In contrast, the remaining non-agency MBS experienced 60 day+ delinquencies of 2.71%, on average, at March 31, 2009.
The market value of the ABS portfolio includes $134.9 million of securities backed primarily by banking institutions, $38.0 million of securities backed by insurance
companies, and $10.6 million of securities backed by real estate investment trusts (REITs).
A total of twelve REIT trust preferred securities
have been classified as OTTI since the fourth quarter of 2007. In the first quarter of 2009, four REIT bonds previously written down had an additional write down of $1.5 million. Two REIT securities, rated AAA and AA respectively, with a market
value of $3.3 million have not been written down due to their strong levels of credit support. As of March 31, 2009, the REIT pooled trust preferred securities portfolio has been written down from $107.1 million to $19.1 million. Seven REIT
pooled trust preferred securities with a book value of $8.1 million are classified as non-performing investments; these seven securities deferred their first quarter 2008 interest payments. The remaining six securities made their payments in the
first quarter of 2009.
Seventeen bank pooled trust preferred securities were written down in the first quarter of 2009. The securities were written down
from a book value of $83.4 million to $32.1 million. Of the seventeen securities, three are not currently paying interest. Each of the seventeen bonds are not projected to completely repay principal. The projected shortfall in principal to be
collected is based on cash flow projections. Cash flows were modeled using a thirty-year estimate for defaults.
The municipal bond portfolio has a market
value of $153.6 million. The portfolio consists of federal tax-exempt general obligation securities which are geographically diversified. The portfolio has no exposure to Florida and less than 2% exposure to California
45
and Nevada combined. The portfolio includes $133.8 million of securities insured by bond insurers. Additionally, all of the municipalities have underlying
ratings of A, AA, or AAA and none of the issuers have experienced a downgrade as of the end of the first quarter 2009. The Corporation has not experienced any OTTI associated with the municipal bond portfolio.
The corporate bond portfolio is composed of single issuer corporate bonds rated investment grade by Moodys or S&P. The portfolio, totaling $59.2 million
(market value), consists of commercial bank trust preferred securities. Ninety seven percent of the bonds are from the largest 75 banks in the country. Other debt securities include U.S. Treasury, Agency, and sovereign securities. The Corporation
has not experienced any OTTI associated with the corporate bond portfolio.
In addition to credit risk, the other significant risk in the investment
portfolio is duration risk. Duration measures the expected change in the market value of an investment for a 100 basis point (or 1%) change in interest rates. The higher an investments duration, the longer the time until its rate is reset to
current market rates. The Banks risk tolerance, as measured by the duration of the investment portfolio, is currently 4.1%.
In April 2009, the FASB
issued FSP FAS 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and 124-2), which will be effective for interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. This FSP changes the requirements for recognizing OTTI for debt securities and modifies the criteria used to assess the collectability of cash flows when determining the potential for
OTTI. The FSP further modifies the presentation of OTTI losses and increases the frequency of and expands existing disclosure requirements.
Although the
Corporation decided against early adoption of the changes set forth in FAS 115-2, management is currently evaluating the estimated credit impairment component of the Corporations other-than-temporary impairment losses using the EITF 99-20
approach recommended in FSP FAS 115-2 and FAS 124-2. As it relates to the structured investments portion of its portfolio, the Corporation estimated the effect of this standard as of March 31, 2009, would reduce cumulative impairments recognized by
approximately $120 million. Total stockholders equity would be unchanged.
The table below displays the estimated credit and other impairments, and
total other-than-temporary impairment calculated for the first quarter of 2009 and the cumulative amount, for the Corporations structured investment portfolios. Management has also evaluated all the other investment portfolios for impairment
under the new guidance that will become effective after June 15, 2009 and estimated that the credit impairment impact for the remainder of the portfolios would be immaterial to the Corporations financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ millions)
|
|
At March 31, 2009
|
|
1Q 2009
|
|
Cumulative
|
|
|
Par
Value
|
|
Book
Value
|
|
Fair
Value
|
|
Estimated
Credit
Loss
|
|
Estimated
Other
Loss
|
|
|
Total
OTTI
|
|
Estimated
Credit
Loss
|
|
Estimated
Other
Loss
|
|
Total
OTTI
|
Non-Agency MBS
|
|
$
|
122.3
|
|
$
|
52.3
|
|
$
|
49.5
|
|
$
|
4.3
|
|
$
|
12.4
|
|
|
$
|
16.7
|
|
$
|
37.2
|
|
$
|
32.7
|
|
$
|
69.9
|
REIT Pooled TRUPS
|
|
|
107.1
|
|
|
19.1
|
|
|
10.6
|
|
|
2.0
|
|
|
(0.5
|
)
|
|
|
1.5
|
|
|
69.7
|
|
|
16.2
|
|
|
85.9
|
Bank and Insurance Pooled TRUPS
|
|
|
479.9
|
|
|
336.0
|
|
|
173.0
|
|
|
8.9
|
|
|
60.3
|
|
|
|
69.2
|
|
|
28.7
|
|
|
71.1
|
|
|
99.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Totals
|
|
$
|
709.3
|
|
$
|
407.4
|
|
$
|
233.1
|
|
$
|
15.2
|
|
$
|
72.2
|
|
|
$
|
87.4
|
|
$
|
135.6
|
|
$
|
120.0
|
|
$
|
255.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following pro forma amounts are presented to show the effects on selected financial performance measurements
of the new accounting standard for recognizing OTTI had the Corporation adopted the new accounting standard for the quarter ended March 31, 2009.
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
As Reported
|
|
|
Proforma
|
|
Net loss
|
|
$
|
(67,216
|
)
|
|
$
|
(23,715
|
)
|
Net loss applicable to common stockholders
|
|
$
|
(70,907
|
)
|
|
$
|
(27,406
|
)
|
Dilutive EPS
|
|
$
|
(2.12
|
)
|
|
$
|
(0.82
|
)
|
Tangible common equity
|
|
|
4.19
|
%
|
|
|
5.36
|
%
|
Tier 1 leverage
|
|
|
7.34
|
%
|
|
|
9.19
|
%
|
Tier 1 capital to risk-weighted assets
|
|
|
6.60
|
%
|
|
|
7.75
|
%
|
Total regulatory capital to risk-weighted assets
|
|
|
8.58
|
%
|
|
|
9.69
|
%
|
Total stockholders' equity
|
|
$
|
609,093
|
|
|
$
|
609,093
|
|
46
Fair Value Measurements
Fair value is defined as the price to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants as of the measurement date. SFAS No. 157 Fair Value Measurements (SFAS
No. 157) establishes a framework for measuring fair value that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based on the transparency of inputs to
each valuation as of the fair value measurement date. The statement also expands disclosures about financial instruments that are measured at fair value and eliminates the use of large position discounts for financial instruments quoted in active
markets. If there is limited market activity for an asset or liability at the measurement date, the fair value is the price that would be received between a buyer and a seller, rather than a forced liquidation or distressed sale. A transaction is
forced if the transaction occurs under duress or the seller otherwise is forced to accept a price that a willing market participant would not accept.
Hierarchy Levels
SFAS No. 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements.
The valuation hierarchy is based on the inputs used to value the particular asset or liability at the measurement date. The three levels are defined as follows:
|
|
|
Level 1 quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in
markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
|
|
Level 3 inputs that are unobservable and significant to the fair value measurement.
|
At the end of each quarter, the Corporation assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be
transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. The following is a description of the valuation methodologies and other relevant information to provide the
investors with a better understanding of how the Corporation determines fair value and the methods and assumptions underlying these measurements.
Mortgage Loans held for sale
Loans held for sale are first mortgage loans that are originated by the Corporation under loan programs offered by a third party who has contractual rights to process and purchase the loans
at their face value.
|
|
|
Market
The market for the mortgages originated and subsequently sold to a third party is considered active, due to the contractual agreement and the
ability to sell the loans in an open market, if necessary.
|
|
|
|
Fair Value
Loans are valued based on the unobservable contractual terms established with a third party purchaser. Credit risk is not incorporated in
fair values due to the contractual terms with the party to purchase the asset at the agreed upon price.
|
Investment
Securities
The investment securities portfolio consists of U.S. treasuries, agency MBS, non-agency MBS, municipal securities, bank and insurance pooled trust preferred securities, REIT pooled trust preferred securities and corporate
securities. These securities are classified within each of the three level hierarchies established by SFAS No. 157. The following is a description of how the Corporation determines fair value and the valuation hierarchy for each security type.
U.S. Treasuries
Debt issued and backed by the full faith and credit of the U.S. government.
|
|
|
Market
The market is considered active for these securities as they trade routinely each business day.
|
|
|
|
Fair Value
The Corporation uses inputs provided by an independent third party pricing service in establishing the fair value measurement for this
security type and the prices are non-binding. Management validates the inputs received in determining fair value. Pricing is made available from industry participants who report bid/ask markets that represent an executable trade level for these
securities. The securities are priced using a market pricing approach incorporating trades of the same securities and market quotes.
|
47
Agency MBS/ARM
Securities issued by U.S. government agencies and backed by the full faith and credit of the
U.S. government.
|
|
|
Market
The market is considered active for these securities as they trade routinely each business day.
|
|
|
|
Fair Value
The Corporation uses inputs provided by an independent third party pricing service in establishing the fair value measurement for this
security type and the prices are non-binding. Management validates the inputs received in determining fair value. The securities are priced using a market pricing approach incorporating market quotes for identical or similar securities and/or inputs
other than quoted prices that are observable for these securities.
|
Municipal Securities
Debt issued by state and local
governments, which issue less than $10 million in annual debt issuance, are considered bank-qualified municipal investments.
|
|
|
Market
The market is considered active, as municipal securities trade daily. Additionally, new issuances have continued in the first quarter of 2009
as indicated by discussions with broker/dealers.
|
|
|
|
Fair Value
The Corporation uses inputs provided by an independent third party pricing service in establishing the fair value measurement for this
security type and the prices are non-binding. Management validates the inputs received in determining fair value. The securities are priced using a market pricing approach using trade data, including, but not limited to, trades of the same
securities and market quotes, and comparable secondary market and new issue trades.
|
Corporate Securities
Single issuer
trust preferred securities issued by financial institutions.
|
|
|
Market
The market is considered active, as broker/dealers have provided confirmation that the corporate securities portfolio or similar securities
trade routinely.
|
|
|
|
Fair Value
The Corporation uses inputs provided by an independent third party pricing service in establishing the fair value measurement for this
security type and the prices are non-binding. Management validates the inputs received in determining fair value. The securities are priced using a market pricing approach, which combines an independent third party pricing services proprietary
pricing models with trade data, including, but not limited to, trades of the same securities and market quotes, comparable new issue and secondary market trades, and inputs other than quoted prices that are observable for these securities.
|
Non-agency MBS
MBS issued by financial institutions other than the U.S. government agencies. The underlying collateral for
the non-agency MBS portfolio consists of prime jumbo and Alt-A mortgage loans issued from 2004-2007. All of the loans are fixed rate 15, 20, or 30 year fully amortizing first lien mortgages with a weighted average loan rate of 6.28%.
|
|
|
Market
The market for these securities is currently considered inactive, with limited trade activity over the past quarter. Market participants have
informed the Corporation that there have been no new fixed issuances and a severe reduction of ARM issuances over the past twelve months. Additionally, there have been few observed secondary trades in the AAA-rated sector and there have been even
fewer secondary trades in the AA-rated sector.
|
|
|
|
Fair Value
The Corporation uses inputs provided by an independent third party pricing service in establishing the fair value measurement for this
security type and the prices are non-binding. Management validates the inputs received in determining fair value. The securities are priced using a market pricing approach, which combines the use of an independent third party pricing services
proprietary pricing models with inputs such as spreads to benchmarks, prepayment speeds, loss, and recovery and default rates that are implied by market prices for similar securities and collateral structure types. Because this valuation technique
involves some Level 3 inputs, the Corporation classifies securities that are valued in this manner as Level 3.
|
REIT pooled trust
preferred securities
Collateralized debt obligations (CDO) issued by a special purpose vehicle (SPV) and backed by a diverse pool of debt, known as CDO collateral.
The underlying collateral is selected and managed by an independent asset manager. The purchase of the CDO collateral is financed through the issuance of debt
obligations and equity by the SPV. The bonds issued by the SPVs are generally segregated into several classes known as tranches. The typical structure will include senior, mezzanine, and equity tranches. The equity tranche represents the first
loss position. Interest and principal collected from the portfolio of collateral is distributed to the holders of the debt obligations of the CDO via a waterfall with a priority of payments that provides the highest level of protection to the
senior-most tranches. In order to provide a high level of protection to the senior tranches, the cash flow waterfall includes coverage tests that divert cash flow if such coverage tests are not met. If the tests are failed, senior tranches receive
higher allocations of cash flows until the applicable tests are satisfied. At March 31, 2009, the Corporation owned senior and mezzanine tranches.
48
The CDO collateral is generally trust preferred securities and subordinated debt securities issued by real estate
investment trusts (REITs). The standard structure for these securities is a 30-year security, callable quarterly after 5 years. Subordinated debt securities are issued by banks or bank holding companies that typically have payoff bullets
with 10 or 20-year maturities.
The term of most trust preferred CDOs is 30 years. Generally, starting after 10 years, the collateral manager is required
to hold auctions of the collateral portfolio in order to redeem the CDO notes. The auction will only be completed if the proceeds of the auction are sufficient to pay all cumulative interest and principal relating the notes then outstanding.
Similarly, the holders of the preferred shares may redeem the notes after five years, but only if the redemption proceeds are sufficient to pay all cumulative interest and principal relating to the notes then outstanding.
|
|
|
Market
The market for these securities is currently considered inactive because of limited market activity or little to no price transparency.
|
|
|
|
Fair Value
The Corporation uses inputs provided by an independent third party pricing service in establishing the fair value measurement for this
security type and the prices are non-binding. Management validates the inputs received in determining fair value. The securities are priced using a market pricing approach, which combines the use of an independent third party pricing services
proprietary pricing models with inputs such as spreads to benchmarks, prepayment speeds, loss, and recovery and default rates that are implied by market prices for similar securities and collateral structure types. Because this valuation technique
involves some Level 3 inputs, the Corporation classifies securities that are valued in this manner as Level 3.
|
Bank and Insurance
pooled trust preferred securities
CDOs issued by a SPV and backed by a diverse pool of debt, known as CDO collateral.
The underlying collateral
is selected and managed by an asset manager. The purchase of the CDO collateral is financed through the issuance of debt obligations and equity by the SPV. The bonds issued by the CDO are generally segregated into several classes known as tranches.
The typical structure will include senior, mezzanine, and equity tranches. The equity tranche represents the first loss position. Interest and principal collected from the portfolio of collateral are distributed to the holders of the debt
obligations of the CDO via a waterfall with a priority of payments that provides the highest level of protection to the senior-most tranches. In order to provide a high level of protection to the senior tranches, the cash flow waterfall includes
coverage tests that divert cash flow if such coverage tests are not met. If the tests are failed, senior tranches receive higher allocations of cash flows until the applicable tests are satisfied. At March 31, 2009, the Corporation owned senior
and mezzanine tranches.
The CDO collateral is generally trust preferred securities and subordinated debt securities issued by banks and bank holding
companies, insurance companies and mortgage REITs. The standard structure for these securities is a 30-year term, callable quarterly after 5 years. Additionally, preferred securities dividend payments may be deferred for up to 5 years; however,
payments are cumulative. Subordinated debt securities are issued by banks or bank holding companies and typically have 10 or 20-year maturities.
In order
to provide a high level of protection to the senior tranches, the cash flow waterfall includes coverage tests that divert cash flows to higher-level tranches if such coverage tests are not met. The legal final maturity date of most trust preferred
CDOs is 30 years. Generally, starting after 10 years, the collateral manager is required to hold auctions of the collateral portfolio in order to redeem the CDO notes. The auction will only be completed if the proceeds of the auction are sufficient
to pay all cumulative interest and principal relating the notes then outstanding. Similarly, the holders of the preferred shares may redeem the notes after five years, but only if the redemption proceeds are sufficient to pay all cumulative interest
and principal relating to the notes then outstanding.
|
|
|
Market
The market for these securities is currently considered inactive because of limited market activity or little to no price transparency.
|
|
|
|
Fair Value
The Corporation uses inputs provided by an independent third party pricing service in establishing the fair value measurement for this
security type and the prices are non-binding. Management validates the inputs received in determining fair value. The securities are priced using a market pricing approach, which combines the use of an independent third party pricing services
proprietary pricing models with inputs such as spreads to benchmarks, prepayment speeds, loss, and recovery and default rates that are implied by market prices for similar securities and collateral structure types. Because this valuation technique
involves some Level 3 inputs, the Corporation classifies securities that are valued in this manner as Level 3.
|
49
The table below summarizes the fair value of investment securities at March 31, 2009 reported in Note 2 for which
inputs were obtained by using a third party pricing service and validated by management.
|
|
|
|
|
|
|
($ in thousands)
|
|
Fair Value
Available
for Sale
|
|
%
|
|
US Treasuries
|
|
$
|
12,994
|
|
1.3
|
%
|
Sovereign
|
|
|
400
|
|
|
|
Agency MBS/ARM
|
|
|
654,736
|
|
66.7
|
|
Municipal securities
|
|
|
153,582
|
|
15.6
|
|
Bank & insurance pooled trust preferred securities
|
|
|
66,175
|
|
6.7
|
|
REIT pooled trust preferred securities
|
|
|
10,607
|
|
1.1
|
|
Non-agency MBS
|
|
|
49,524
|
|
5.0
|
|
Corporate securities
|
|
|
35,119
|
|
3.6
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
983,137
|
|
100.0
|
%
|
|
|
|
|
|
|
|
Derivatives
The Corporation uses various derivative financial instruments as part of its
interest rate risk management strategy to mitigate the exposure to changes in market interest rates. The derivative financial instruments used separately or in combination are interest rate swaps and caps.
|
|
|
Market
The market for interest rate swaps and caps is considered active as they trade routinely each business day.
|
|
|
|
Fair value
The Corporations open derivative positions are valued using third party developed models that use as their basis observable market
data or inputs developed by the third party. These values are validated and corroborated by management. Examples of these derivatives include interest rate swaps and caps where the indices, correlation and contractual rates may be unobservable.
|
The derivative financial instruments valued at fair value at March 31, 2009 incorporate a credit valuation adjustment in the
valuation of the financial instrument. An analysis of each counterparty was performed to determine what, if any, adjustment should be made to the derivative valuations. For each counterparty, the analysis considered the value of all derivative
contracts, the amount of collateral posted, the terms of collateral agreements, size and nature of the derivative position, potential future movements in market rates and derivative values, counterparty credit worthiness, probability of default and
consideration of loss severity.
Fair Values of Level 3 Assets and Liabilities
For the three months ended March 31, 2009, securities classified as Level 3 realized $18.1 million in impairment losses on certain securities that were considered other-than-temporarily impaired. The charge was
recorded to the Condensed Consolidated Statement of Operations. Also, $4.9 million of other comprehensive gain associated with Level 3 securities was recorded to net accumulated other comprehensive losses for the three months ending March 31,
2009 and is reflected in stockholders equity. At March 31, 2009, management has reviewed the severity and duration of the Level 3 securities and has determined it has the ability and intent to hold these securities until the unrealized
loss is recovered.
At March 31, 2009, the Corporation had $147.8 million, or 14.4% of total assets and liabilities valued at fair value that are
considered Level 3 valuations using unobservable inputs. During the three months ended March 31, 2009, Level 3 assets increased $3.5 million or 2.4%. The increase was mainly due to the increase in mortgage loans held for sale, the net change
resulting from write-downs in the investment securities portfolio recorded in 2009, market value changes and principal payments.
50
Borrowings
Treasury
funding, representing brokered certificates of deposit, short-term borrowings excluding repurchase agreements (repo), long-term debt, subordinated debt, and junior subordinated debentures, totaled $1.8 billion in March 31, 2009,
compared to $2.1 billion at year-end 2008
.
Throughout 2009, management has reduced treasury fundings as core deposits have increased. Specifically, since December 31, 2008, brokered certificates of deposit have been reduced by $154.7
million while short-term borrowings have been reduced by $80.3 million. Core deposits grew $222.4 million from year-end 2008 to March 31, 2009, with increases coming from all major categories: savings, checking, certificates of deposit, and
money market deposits.
Providents funds management objectives are two-fold: to minimize the cost of borrowings while assuring sufficient funding
availability to meet current and future customer requirements, and to contribute to interest rate risk management goals through match-funding loan and investment activity. Management utilizes a variety of sources to raise borrowed funds at
competitive rates, including federal funds purchased (fed funds), Federal Home Loan Bank (FHLB) borrowings, Federal Reserve Term Auction Facility (TAF) borrowings, securities sold under repo agreements,
subordinated notes and brokered and jumbo certificates of deposit (CDs). FHLB borrowings, TAF borrowings, and repos typically are borrowed at rates approximating the LIBOR rate for the equivalent term because they are secured with
investments or high quality loans. Fed funds, which are generally overnight borrowings, are typically purchased at the Federal Reserve target rate.
The
Corporation formed wholly owned statutory business trusts in 1998, 2000 and 2003. In 2004, the Corporation also acquired three wholly owned statutory business trusts from Southern Financial as part of the merger. In all cases, the trusts issued
trust preferred securities that were sold to outside third parties. The junior subordinated debentures issued by the Corporation to the trusts are presented net of unamortized issuance costs as long-term debt in the Condensed Consolidated Statements
of Condition and are includable in Tier 1 capital for regulatory capital purposes, subject to certain limitations. Any of the junior subordinated debentures are redeemable at any time in whole, but not in part, from the date of issuance on the
occurrence of certain events. Of the $129.0 million currently outstanding, $121.0 million of issuances are callable within the next twelve months.
Contractual Obligations, Commitments and Off Balance Sheet Arrangements
The Corporation has various contractual obligations, such as
long-term borrowings, that are recorded as liabilities in the Condensed Consolidated Financial Statements. Other items, such as certain minimum lease payments for the use of banking and operations offices under operating lease agreements, are not
recognized as liabilities in the Condensed Consolidated Financial Statements, but are required to be disclosed. Each of these arrangements affects the Corporations determination of sufficient liquidity.
The following table summarizes significant contractual obligations at March 31, 2009 and the future periods in which such obligations are expected to be settled in
cash. In addition, the table reflects the timing of principal payments on outstanding borrowings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Payments Due by Period
|
|
Total
|
(in thousands)
|
|
Less
than 1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
After 5
Years
|
|
Lease commitments
|
|
$
|
14,077
|
|
$
|
25,373
|
|
$
|
19,293
|
|
$
|
24,163
|
|
$
|
82,906
|
Certificates of deposit
|
|
|
1,373,861
|
|
|
561,259
|
|
|
346,340
|
|
|
31,629
|
|
|
2,313,089
|
Long-term debt
|
|
|
330,000
|
|
|
140,000
|
|
|
|
|
|
184,431
|
|
|
654,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual payment obligations
|
|
$
|
1,717,938
|
|
$
|
726,632
|
|
$
|
365,633
|
|
$
|
240,223
|
|
$
|
3,050,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of credit
on revolving credit structures) and letters of credit. Approvals for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and a risk assessment are considered when determining the amount and structure
of credit arrangements. Commitments to extend credit in the form of consumer, commercial real estate and business loans at March 31, 2009 were as follows:
|
|
|
|
(in thousands)
|
|
March 31,
2009
|
Commercial business and real estate
|
|
$
|
693,981
|
Consumer revolving credit
|
|
|
810,853
|
Residential mortgage credit
|
|
|
15,867
|
Performance standby letters of credit
|
|
|
144,743
|
Commercial letters of credit
|
|
|
|
|
|
|
|
Total loan commitments
|
|
$
|
1,665,444
|
|
|
|
|
Historically, many of the commitments expire without being fully drawn; therefore, the total commitment amounts do
not necessarily represent future cash requirements. Obligations also take the form of commitments to purchase loans. At March 31, 2009, the Corporation did not have any firm commitments to purchase loans.
Risk Management
Interest Rate Risk
The nature of the banking business, which involves paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates
interest rate risk. As a result, net interest margin and earnings and the market value of assets and liabilities are subject to fluctuations arising from the movement of interest rates. The Corporation manages several forms of interest rate risk,
including asset/liability mismatch, basis risk and prepayment risk. A key management objective is to maintain a risk profile in which variations in net interest income stay within the limits and guidelines of the banks Asset/Liability
Management Policy.
Management continually monitors basis risk such as Prime/LIBOR spread and asset/liability mismatch. Basis risk exists as a result of
having much of the Banks earning assets priced using the Prime rate, while much of the liability portfolio is priced using the certificate of deposit or LIBOR yield curve. Historically, the various pricing indices and yield curves have been
highly correlated, however, in recent quarters some of these relationships have moved outside of their normal boundaries. As an example, the spread between Prime and 1-Month LIBOR moved in a range between 2.63% and 2.93% for the two years ending
July 31, 2007 a difference of 0.30% from high to low. As credit issues began to arise in sub-prime mortgages and certain other assets in the third quarter of 2007, the Prime/LIBOR spread became increasingly volatile. For the period from
August 1, 2007 to August 31, 2008, the Prime/LIBOR spread posted a low of 2.05% in December 2007 and a high of 3.44% in March 2008 a range of 1.39%. In the most recent two quarters, the Prime/Libor basis has been even more
volatile. From September 1, 2008 to March 31, 2009, the Prime/LIBOR spread posted a trough of -0.09% and a peak of 3.04% a range of 3.13%. Such volatility has contributed a measure of uncertainty to the modeling of interest rate
risk in the first quarter of 2009.
The Corporation acquires and originates loans and purchases investment securities in which the underlying assets are
residential mortgage loans subject to prepayments. The actual principal reduction on these assets varies from the expected contractual principal reduction due to principal prepayments resulting from the sale of underlying properties or
borrowers elections to refinance the underlying mortgages based on market and other conditions. Prepayment rate projections utilize actual prepayment speed experience and available market information on like-kind instruments. The prepayment
rates form the basis for income recognition of premiums or discounts on the related assets. Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that the assets are held creating volatility in the
net interest margin. Prepayment rate assumptions are monitored and updated as needed to reflect actual activity and the most recent market projections.
Measuring and managing interest rate risk is a dynamic process that management performs continually to meet the objective of maintaining a stable net interest margin. This process relies chiefly on the simulation of net interest income over
multiple interest rate scenarios or shocks. The modeled scenarios begin with a base case in which rates are unchanged and include parallel and non-parallel rate shocks. The non-parallel shifts include yield curve flattening and
steepening scenarios as well as a move to the implied-forward yield curve. The results of these shocks are measured in two forms: first, the impact on the net interest margin and earnings over one and two year time frames; and second, the impact on
the market value of equity. In addition to measuring the basis risks and prepayment risks noted above, simulations also quantify the earnings impact of rate changes and the cost / benefit of hedging strategies.
52
The following table shows the anticipated effect on net interest income in parallel shift (up or down) interest rate
scenarios. These rate shifts are assumed to begin in the first month of the simulation and to occur over a 6-month period. Figures in the table below show the impact of a change in rates over a twelve month horizon.
|
|
|
|
|
Interest Rate Scenario
|
|
At March 31, 2009
Projected
Percentage Change in
Net Interest Income
|
|
At December 31, 2008
Projected
Percentage Change in
Net Interest Income
|
+200 basis points
|
|
6.30%
|
|
4.80%
|
+100 basis points
|
|
3.60%
|
|
2.90%
|
No change
|
|
|
|
|
-100 basis points
|
|
NA
|
|
NA
|
-200 basis points
|
|
NA
|
|
NA
|
Simulation modeling shows that the Corporations net interest income is expected to increase as interest
rates rise. Management routinely models several yield curve flattening and steepening scenarios as part of its interest rate risk management function, and this modeling discloses little risk under most yield curve twisting scenarios. Because the
Federal Open Market Committee is targeting the level of Fed Funds between 0.0% and 0.25%, management is not modeling parallel shifts down. The current economic environment includes concerns about the dramatic reshaping of financial firms and the
impact of the U.S. governments plans to resuscitate the housing market and financial system. At this point in time, there continues to be reason to believe that short-term rates will remain low in the near term.
Management employs the investment, borrowing, and derivative portfolios in implementing the interest rate strategies. To protect against falling short-term interest
rates, the Corporation has $615 million of receive fixed/pay floating interest rate swaps in position as of March 31, 2009. In the borrowings portfolio, $180 million of funding have rates which reset quarterly based upon long-term interest
rates to mitigate the impact of accelerating prepayment activity due to a decline in long-term interest rates. Another $250 million of FHLB advances re-price no less than quarterly and will benefit in falling rate scenarios. Of the $250 million
floating rate advances, $145 million contain embedded floors, which provide additional benefit as interest rates decline.
Credit Risk
In addition to managing interest rate risk, which applies to both assets and liabilities, the Corporation must understand and manage risks specific to lending. Much of
the fundamental lending business of Provident is based upon understanding, measuring and controlling credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. Each
consumer and residential lending product has a generally predictable level of credit loss based on historical loss experience. Home mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans with medium credit
loss experience are primarily secured products such as auto and marine loans. Unsecured loan products such as personal revolving credit have the highest credit loss experience; therefore the Bank has chosen not to engage in a significant amount of
this type of lending. Credit risk in commercial lending varies significantly, as losses as a percentage of outstanding loans can shift widely from period to period and are particularly sensitive to changing economic conditions. Generally improving
economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet debt service requirements. However, this improvement in operating cash flow is often at least partially offset by rising
interest rates often seen in an improving economic environment. In addition, changing economic conditions often impact various business segments differently, giving rise to the need to manage industry concentrations within the loan portfolio.
To control and manage credit risk, management has set high credit standards along with an in-house administration and strong oversight procedures and a
cautious approach to adopting products before they have been sufficiently tested in the market place. In addition, the Corporation maintains a fairly balanced portfolio concentration between home equity, commercial and residential real estate and
commercial business loans. The Corporations assessment of the loan portfolios credit risk and asset quality is measured by its levels of delinquencies, non-performing asset levels and net-charge-offs. For the quarter ending
March 31, 2009, the 90-day delinquency level was $12.9 million, or 0.30% of loans, down by $1.6 million from December 31, 2008. Non-performing loans were $112.2 million, or 2.60% of total loans at March 31, 2009, compared to 1.94% as
of December 31, 2008. Net charge-offs as a percentage of average loans for the quarter ended March 31, 2009 were 1.26% compared to 0.75% for the fourth quarter of 2008. Overall, the loan quality of the Corporations loan portfolio has
declined to levels that were expected given the current economic environment during these uncertain times.
Managing credit risk is an integral part of the
investment portfolio management process for the Corporation. The investment portfolio contains three distinct types of credit risks: risk to residential mortgage borrowers, risk to corporate entities, and risk to municipalities. Each risk is
monitored and controlled separately.
53
Risk to residential mortgage borrowers is inherent in the non-agency MBS portfolio. This risk is controlled by purchasing
securities in which the underlying loans have favorable risk characteristics, such as low loan-to-value ratios and high borrower credit scores. The risk is further controlled through purchasing only the top two (AAA and AA) classes of securities,
which contain greater levels of credit support than the lower rated classes. Management monitors the risk through tracking the delinquencies and foreclosures of the underlying loans monthly and monitoring primary and secondary market activity for
similar securities. All investment securities disclosed on page 44 were purchased with an AA rating or higher.
Risk to corporate entities is inherent in
the REIT, Bank, and Insurance pooled trust preferred securities portfolios, and the individual bank trust preferred stock investments. Risk is controlled in the pooled securities through identifying the issuer exposures for each pool, and limiting
purchases to securities in the top three rating classes (AAA, AA, and A), which have significant levels of credit support. Risk is monitored through tracking the financial performance of large issuers and issuers considered to be at risk to deferral
or default of payment. Additionally, issuers actual default and deferral experience and expected future outlook are measured against the credit support levels to evaluate the extent of risk to the securities. Market activity is monitored on an
ongoing basis. Risk to individual bank debt is controlled by purchasing securities of high quality issuers as assessed internally and corroborated by external ratings. Management monitors risk through tracking the issuers financial performance
quarterly or more frequently as needed, and monitoring market activity on an ongoing basis.
Risk to municipalities is controlled through limiting
purchases to general obligation bonds of municipalities rated AAA, AA, or A, limiting exposure to individual municipalities, and limiting state concentrations. Risk is further controlled by limits placed on the exposure to individual bond insurers
that provide credit enhancements. Management monitors risk through tracking the credit ratings of each municipality monthly and tracking the financial condition of bond insurers. Market activity is also tracked on an ongoing basis.
Credit criteria and purchase limits for all investments containing credit risk are defined in documented and frequently reviewed investment policies and subject to
approval by the Asset / Liability Committee (ALCO). The ALCO also monitors the portfolio credit risk monthly.
Other Lending Risks
Other lending risks include liquidity risk and specific risk. The liquidity risk of the Corporation arises from its obligation to make payment in the
event of a customers contractual default. The evaluation of specific risk is a basic function of underwriting and loan administration, involving analysis of the borrowers ability to service debt as well as the value of pledged
collateral. In addition to impacting individual lending decisions, this analysis may also determine the aggregate level of commitments the Corporation is willing to extend to an individual customer or a group of related customers.
RESULTS OF OPERATIONS
For Three Months Ended March 31, 2009
Compared to Three Months Ended March 31, 2008
Financial Highlights
The Corporation reported a net loss of $67.2 million for the quarter ended March 31, 2009 compared to a net loss of $17.6 million for the quarter ended March 31, 2008. The net loss available to common
stockholders was $70.9 million, or $2.12 per diluted share, for the quarter ended March 31, 2009 compared to a $17.6 million net loss, or $(0.56) per diluted share, for the quarter ended March 31, 2008. Refer to pages 44-46 for the
discussion on OTTI and the estimated impact on the first quarter of 2009 if the Corporation early adopted the new accounting standards discussed in Note 1 on page 8. The financial results for the first quarter of 2009 were substantially
impacted by the deterioration in the economic conditions that have impacted the performance of the Corporations investment securities and loan portfolios. This and other activities presented below reflect a decline in net interest income of
$10.0 million, an increase in the provision for loan losses of $32.5 million, a decline in non-interest income of $47.9 million and an increase in non-interest expense of $5.9 million, offset by a decline in income tax expense of $46.7 million,
resulting in a $49.6 million decrease in net income. During the first quarter of 2009, the net interest margin declined to 2.48% from 3.17%; average total loans increased $117.1 million, or 2.8%, average customer deposits increased $236.6 million,
or 7.0%, while asset quality weakened as non-performing loans increased to 2.60% of total loans at March 31, 2009, net charge-offs to average loans were 1.26% and non-performing investments were 7.83% of total investments at March 31,
2009. Earnings for the quarters ending March 31, 2009 and March 31, 2008 include the following significant transactions and are included in the subsequent discussions regarding the results of operations:
|
|
|
Write-down in investment securities:
In the first quarter of 2009, the Corporation recorded a $87.4 million pre-tax write-down relating to certain segments
of its securities portfolio. Following its quarterly credit review of each security, the Corporation wrote down the values of certain securities by reducing their carrying values to their current fair value at those dates. The $87.4 million was
comprised of $1.5 million in the REIT pooled trust preferred securities portfolio, $16.6 million in the non-agency MBS portfolio and $69.3 million in the bank pooled trust preferred securities portfolio. In the first quarter of 2008, the Corporation
recorded a $42.7 million pre-tax write-down relating to its REIT pooled trust preferred securities portfolio and non-agency MBS portfolio. Refer to Note 3 to the Condensed Consolidated Financial Statements for further update on the
Corporations investment securities portfolio.
|
54
|
|
|
Loan loss provision:
The provision for loan losses was $35.6 million for the quarter ended March 31, 2009 compared to $3.1 million for the quarter ended
March 31, 2008. The $32.5 million increase in the provision for loan losses in the first quarter of 2009 was mainly a result of increased net charge-offs and higher non-performing loans along with the downgrading of internal risk ratings for
certain loans. The current quarter includes $6.8 million in charge-offs associated with two residential construction loans.
|
Net
Interest Income
The Corporations principal source of revenue is net interest income, the difference between interest income on earning assets and
interest expense on deposits and borrowings. Interest income is presented on a tax-equivalent basis to recognize associated tax benefits in order to provide a basis for comparison of yields with taxable earning assets. The following table presents
information regarding the average balance of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average
yields and costs. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Nonaccrual loans are included in average
loan balances; however, accrued interest income has been excluded from these loans. The tables on the following pages also analyze the reasons for the changes from year-to-year in the principal elements that comprise net interest income. Rate and
volume variances presented for each component will not total the variances presented on totals of interest income and interest expense because of shifts from year-to-year in the relative mix of interest-earning assets and interest-bearing
liabilities.
55
Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income
Three Months Ended March 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2009
|
|
|
Three Months Ended
March 31, 2008
|
|
(dollars in thousands)
|
|
Average
Balance
|
|
Income/
Expense
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
Income/
Expense
|
|
Yield/
Rate
|
|
(tax-equivalent basis)
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated and acquired residential
|
|
$
|
247,102
|
|
$
|
3,564
|
|
5.85
|
%
|
|
$
|
290,093
|
|
$
|
4,411
|
|
6.12
|
%
|
Home equity
|
|
|
1,172,513
|
|
|
10,747
|
|
3.72
|
|
|
|
1,086,463
|
|
|
15,682
|
|
5.81
|
|
Marine
|
|
|
335,673
|
|
|
4,311
|
|
5.21
|
|
|
|
357,963
|
|
|
4,927
|
|
5.54
|
|
Other consumer
|
|
|
22,609
|
|
|
358
|
|
6.42
|
|
|
|
24,251
|
|
|
460
|
|
7.63
|
|
Commercial mortgage
|
|
|
573,668
|
|
|
7,841
|
|
5.54
|
|
|
|
445,465
|
|
|
7,335
|
|
6.62
|
|
Residential construction
|
|
|
506,756
|
|
|
3,996
|
|
3.20
|
|
|
|
613,126
|
|
|
10,241
|
|
6.72
|
|
Commercial construction
|
|
|
491,623
|
|
|
3,906
|
|
3.22
|
|
|
|
475,882
|
|
|
7,385
|
|
6.24
|
|
Commercial business
|
|
|
997,376
|
|
|
13,468
|
|
5.48
|
|
|
|
936,933
|
|
|
15,932
|
|
6.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
4,347,320
|
|
|
48,191
|
|
4.50
|
|
|
|
4,230,176
|
|
|
66,373
|
|
6.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
10,112
|
|
|
119
|
|
4.77
|
|
|
|
9,810
|
|
|
155
|
|
6.35
|
|
Short-term investments
|
|
|
2,339
|
|
|
4
|
|
0.69
|
|
|
|
2,718
|
|
|
36
|
|
5.33
|
|
Taxable investment securities
|
|
|
1,331,682
|
|
|
16,022
|
|
4.88
|
|
|
|
1,425,086
|
|
|
19,731
|
|
5.57
|
|
Tax-advantaged investment securities
|
|
|
163,900
|
|
|
2,279
|
|
5.64
|
|
|
|
154,757
|
|
|
2,433
|
|
6.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,495,582
|
|
|
18,301
|
|
4.96
|
|
|
|
1,579,843
|
|
|
22,164
|
|
5.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
5,855,353
|
|
|
66,615
|
|
4.61
|
|
|
|
5,822,547
|
|
|
88,728
|
|
6.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
71,557
|
|
|
|
|
|
|
|
|
55,171
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
107,955
|
|
|
|
|
|
|
|
|
101,630
|
|
|
|
|
|
|
Other assets
|
|
|
720,985
|
|
|
|
|
|
|
|
|
642,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,612,736
|
|
|
|
|
|
|
|
$
|
6,511,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
451,186
|
|
|
228
|
|
0.20
|
|
|
$
|
458,059
|
|
|
543
|
|
0.48
|
|
Money market deposits
|
|
|
661,403
|
|
|
2,790
|
|
1.71
|
|
|
|
653,693
|
|
|
4,477
|
|
2.75
|
|
Savings deposits
|
|
|
609,634
|
|
|
994
|
|
0.66
|
|
|
|
518,370
|
|
|
508
|
|
0.39
|
|
Direct time deposits
|
|
|
1,213,271
|
|
|
9,385
|
|
3.14
|
|
|
|
1,085,293
|
|
|
11,474
|
|
4.25
|
|
Brokered time deposits
|
|
|
1,168,977
|
|
|
12,174
|
|
4.22
|
|
|
|
874,172
|
|
|
11,208
|
|
5.16
|
|
Short-term borrowings
|
|
|
365,734
|
|
|
750
|
|
0.83
|
|
|
|
811,651
|
|
|
6,089
|
|
3.02
|
|
Long-term debt
|
|
|
663,875
|
|
|
4,539
|
|
2.77
|
|
|
|
771,672
|
|
|
8,487
|
|
4.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
5,134,080
|
|
|
30,860
|
|
2.44
|
|
|
|
5,172,910
|
|
|
42,786
|
|
3.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
|
659,644
|
|
|
|
|
|
|
|
|
643,161
|
|
|
|
|
|
|
Other liabilities
|
|
|
61,479
|
|
|
|
|
|
|
|
|
75,349
|
|
|
|
|
|
|
Stockholders equity
|
|
|
757,533
|
|
|
|
|
|
|
|
|
619,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
6,612,736
|
|
|
|
|
|
|
|
$
|
6,511,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
|
|
$
|
721,273
|
|
|
|
|
|
|
|
$
|
649,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax-equivalent)
|
|
|
|
|
|
35,755
|
|
|
|
|
|
|
|
|
45,942
|
|
|
|
Less: tax-equivalent adjustment
|
|
|
|
|
|
775
|
|
|
|
|
|
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
34,980
|
|
|
|
|
|
|
|
$
|
44,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on interest-earning assets on a tax-equivalent basis
|
|
|
|
|
|
|
|
2.48
|
%
|
|
|
|
|
|
|
|
3.17
|
%
|
56
Consolidated Average Balances and Analysis of Changes in Tax Equivalent Net Interest Income (Continued)
Three Months Ended March 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Quarter to 2008 Quarter Increase/(Decrease)
|
|
|
2009/2008
Income/Expense Variance
Due to Change In
|
|
(dollars in thousands)
|
|
Average
Balance
|
|
|
%
Change
|
|
|
Income/
Expense
|
|
|
%
Change
|
|
|
Average
Rate
|
|
|
Average
Volume
|
|
(tax-equivalent basis)
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated and acquired residential
|
|
$
|
(42,991
|
)
|
|
(14.8
|
)%
|
|
$
|
(847
|
)
|
|
(19.2
|
)%
|
|
$
|
(192
|
)
|
|
$
|
(655
|
)
|
Home equity
|
|
|
86,050
|
|
|
7.9
|
|
|
|
(4,935
|
)
|
|
(31.5
|
)
|
|
|
(6,063
|
)
|
|
|
1,128
|
|
Marine
|
|
|
(22,290
|
)
|
|
(6.2
|
)
|
|
|
(616
|
)
|
|
(12.5
|
)
|
|
|
(300
|
)
|
|
|
(316
|
)
|
Other consumer
|
|
|
(1,642
|
)
|
|
(6.8
|
)
|
|
|
(102
|
)
|
|
(22.2
|
)
|
|
|
(71
|
)
|
|
|
(31
|
)
|
Commercial mortgage
|
|
|
128,203
|
|
|
28.8
|
|
|
|
506
|
|
|
6.9
|
|
|
|
(1,331
|
)
|
|
|
1,837
|
|
Residential construction
|
|
|
(106,370
|
)
|
|
(17.3
|
)
|
|
|
(6,245
|
)
|
|
(61.0
|
)
|
|
|
(4,692
|
)
|
|
|
(1,553
|
)
|
Commercial construction
|
|
|
15,741
|
|
|
3.3
|
|
|
|
(3,479
|
)
|
|
(47.1
|
)
|
|
|
(3,710
|
)
|
|
|
231
|
|
Commercial business
|
|
|
60,443
|
|
|
6.5
|
|
|
|
(2,464
|
)
|
|
(15.5
|
)
|
|
|
(3,401
|
)
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
117,144
|
|
|
2.8
|
|
|
|
(18,182
|
)
|
|
(27.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
302
|
|
|
3.1
|
|
|
|
(36
|
)
|
|
(23.2
|
)
|
|
|
(40
|
)
|
|
|
4
|
|
Short-term investments
|
|
|
(379
|
)
|
|
(13.9
|
)
|
|
|
(32
|
)
|
|
(88.9
|
)
|
|
|
(28
|
)
|
|
|
(4
|
)
|
Taxable investment securities
|
|
|
(93,404
|
)
|
|
(6.6
|
)
|
|
|
(3,709
|
)
|
|
(18.8
|
)
|
|
|
(2,425
|
)
|
|
|
(1,284
|
)
|
Tax-advantaged investment securities
|
|
|
9,143
|
|
|
5.9
|
|
|
|
(154
|
)
|
|
(6.3
|
)
|
|
|
(284
|
)
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
(84,261
|
)
|
|
(5.3
|
)
|
|
|
(3,863
|
)
|
|
(17.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
32,806
|
|
|
0.6
|
|
|
|
(22,113
|
)
|
|
(24.9
|
)
|
|
|
(22,590
|
)
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan losses
|
|
|
16,386
|
|
|
29.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
6,325
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
78,662
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
101,407
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
(6,873
|
)
|
|
(1.5
|
)
|
|
|
(315
|
)
|
|
(58.0
|
)
|
|
|
(307
|
)
|
|
|
(8
|
)
|
Money market deposits
|
|
|
7,710
|
|
|
1.2
|
|
|
|
(1,687
|
)
|
|
(37.7
|
)
|
|
|
(1,738
|
)
|
|
|
51
|
|
Savings deposits
|
|
|
91,264
|
|
|
17.6
|
|
|
|
486
|
|
|
95.7
|
|
|
|
386
|
|
|
|
100
|
|
Direct time deposits
|
|
|
127,978
|
|
|
11.8
|
|
|
|
(2,089
|
)
|
|
(18.2
|
)
|
|
|
(3,292
|
)
|
|
|
1,203
|
|
Brokered time deposits
|
|
|
294,805
|
|
|
33.7
|
|
|
|
966
|
|
|
8.6
|
|
|
|
(2,281
|
)
|
|
|
3,247
|
|
Short-term borrowings
|
|
|
(445,917
|
)
|
|
(54.9
|
)
|
|
|
(5,339
|
)
|
|
(87.7
|
)
|
|
|
(3,036
|
)
|
|
|
(2,303
|
)
|
Long-term debt
|
|
|
(107,797
|
)
|
|
(14.0
|
)
|
|
|
(3,948
|
)
|
|
(46.5
|
)
|
|
|
(2,873
|
)
|
|
|
(1,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
(38,830
|
)
|
|
(0.8
|
)
|
|
|
(11,926
|
)
|
|
(27.9
|
)
|
|
|
(11,600
|
)
|
|
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
|
16,483
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
(13,870
|
)
|
|
(18.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
137,624
|
|
|
22.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
101,407
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
|
|
$
|
71,636
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax-equivalent)
|
|
|
|
|
|
|
|
|
|
(10,187
|
)
|
|
(22.2
|
)
|
|
$
|
(10,990
|
)
|
|
$
|
803
|
|
Less: tax-equivalent adjustment
|
|
|
|
|
|
|
|
|
|
(178
|
)
|
|
(18.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
|
|
$
|
(10,009
|
)
|
|
(22.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
The net interest margin on a tax-equivalent basis decreased 69 basis points for the quarter ended March 31, 2009 to
2.48% from 3.17%, in the comparable quarter a year ago. The decline was primarily caused by the 152 basis point decline in asset yields that were negatively impacted by the 200 basis point decline in benchmark interest rates during the past twelve
months along with the impact from reversals of uncollected interest on securities and loans placed on non-accrual during the year. This decline was not fully offset by the 89 basis point decline in the rates on interest-bearing liabilities.
Aggressive competition for deposits throughout the industry, higher cost brokered certificates of deposit and the issuance of $50.0 million in subordinated debt at 9.50% in April 2008 resulted in the slower decline in rates on interest-bearing
liabilities as compared to yields on interest-earning assets.
Year over year average earning assets increased to $5.9 billion as a result of solid
internally generated loan growth. The net average loan growth of $160.1 million in relationship-based loans was offset by the run-off of $43.0 million in originated and acquired portfolios and a $84.3 million reduction in investment securities due
mainly to the investment write-downs over the past twelve months. The yields on investments and loans declined 68 and 181 basis points, respectively. The yield decline in the loan and investment portfolios resulted from the decrease in year over
year market interest rates and the composition of these portfolios. Interest income for the quarter ended March 31, 2009 was negatively impacted by a reversal of $405 thousand in interest income related to certain investment securities that
were considered non-performing. In the first quarter of 2008, the interest reversals on investment securities totaled $588 thousand. Interest-bearing liabilities decreased by $38.8 million while the average rate paid decreased by 89 basis points.
The decrease in the average rate paid was primarily due to the shift in deposit and borrowing mix in addition to the decline in interest rates that impacted interest bearing demand deposits, money market deposits, time deposits and short and
long-term debt. Savings rates increased over the same period a year ago as a result of an increase of $112.9 million in higher cost online saving deposit balances. In addition, interest expense was positively impacted by a $16.5 million increase in
average non-interest-bearing demand deposit balances during the first quarter of 2009 compared to the same period a year ago.
The 4.61% yield on earning
assets decreased 152 basis points from the first quarter of 2008 as a result of declining interest rates and the change in asset mix and the reversal of interest income associated with the investment securities, while total interest-bearing
liabilities decreased by 89 basis points to 2.48%. Net interest income on a tax-equivalent basis was $35.8 million in the first quarter of 2009 compared to $45.9 million in the same period a year ago. Total interest income decreased by $22.1 million
and total interest expense decreased by $11.9 million, resulting in a net decline in net interest income on a tax-equivalent basis of $10.2 million. Growth in the key loan portfolios of home equity, commercial real estate and commercial banking were
not enough to offset the $22.1 million decline in total interest income that was negatively impacted from the net decline in interest rates. The impact from declining rates and the change in deposit and borrowing mix were the primary causes of the
decline in interest expense of $11.9 million.
Future growth in net interest income will depend upon consumer and commercial loan demand, growth in
deposits and the general level of interest rates.
Provision for Loan Losses
The provision for loan losses increased $32.5 million to $35.6 million for the quarter ended March 31, 2009, compared to $3.1 million for the same quarter a year ago. The current quarters provision for loan
losses includes the impact from increases in non-performing loans and net charge-offs, along with the impact from the downgrading of internal risk ratings for certain loans and the increased uncertainties in the regional markets. In the quarter
ended March 31, 2009, net charge-offs were $13.5 million, or 1.26% of average loans, compared to $3.1 million, or 0.30% of average loans in the quarter ended March 31, 2008. Total consumer loan net charge-offs as a percentage of average
total consumer loans were 0.87% in the quarter ended March 31, 2009, compared to 0.21% in the same period a year ago. Total commercial loan net charge-offs as a percentage of average commercial loans were 1.52%, an increase from 0.36% in the
same period a year ago. The allowance for loan losses to total loans was 2.21% at March 31, 2009, compared to 1.31% at March 31, 2008. The Corporation continues to emphasize quality underwriting as well as aggressive management of
charge-offs and potential problem loans within this uncertain market to minimize the exposure to future charge-offs.
Non-Interest Income
Total non-interest income declined $47.9 million to a loss of $63.0 million for the quarter ended March 31, 2009. The current quarter includes a
$87.4 million loss associated with impairment on investment securities. In the quarter ended March 31, 2008, the Corporation wrote-down $42.7 million on its investment securities.
Exclusive of the impairment on investment securities, non-interest income declined $3.2 million to $24.4 million in the quarter ended March 31, 2009. The decline was primarily caused by a decline in deposit fee
income of $3.3 million, or 15.8%, to $17.7 million in the first quarter of 2009. The decrease in deposit fee income reflects a $2.7 million decline in consumer deposit fees, mainly associated with NSF fees and account service fees along with a
decline of $580 thousand in commercial deposit fees. In the current quarter ended March 31, 2009, customer deposit balances have increased, negatively impacting the level of transaction fees associated transaction based fees.
58
Commissions and fees declined 42.1%, or $658 thousand, to $904 thousand in the quarter ended March 31, 2009
primarily due to a decline in check fees of $333 thousand and a decline of $320 thousand in investment and insurance income.
The quarter ended
March 31, 2009 includes $430 thousand in net gains primarily from a $249 thousand gain from the termination of swaps associated with securities that were written down and $181 thousand gain from other asset sales. The net losses in the quarter
ended March 31, 2008 were composed primarily of $217 thousand loss on an early redemption of brokered certificates of deposit, offset by a slight gain of $26 thousand from other asset sales.
In the quarters ended March 31, 2009 and 2008, certain derivative transactions did not qualify for hedge accounting treatment and, as a result, the gains and losses
associated with these derivatives are recorded in non-interest income. The net cash settlement also related to these derivatives, which represents interest income and expense on non-designated interest rate swaps are recorded as part of non-interest
income. The net revenue impact associated with these derivatives were a net gain of $680 thousand for the quarter ended March 31, 2009, compared to a net gain of $39 thousand in the quarter ended March 31, 2008.
Other non-interest income decreased year over year by $449 thousand to $4.6 million, due to declines in bank owned life insurance income of $708 thousand and lower
mortgage banking activity of $117 thousand. These declines were offset by a $319 thousand death benefit premium associated with a bank owned life insurance policy and increased income associated with commercial loan fees of $95 thousand and lease
income of $154 thousand.
Non-Interest Expense
Total
non-interest expense increased $5.9 million, or 11.5%, to $57.3 million in the quarter ended March 31, 2009. The increase in non-interest expense in the current quarter include increases of $1.2 million in salaries and employee benefits, $178
thousand in occupancy expense, $475 thousand in furniture and equipment costs, $792 thousand in merger related expenses and $3.3 million in other non-interest expense.
The $1.2 million increase in salaries and benefits resulted from increases in base salary expense of $635 thousand due to the impact of annual merit increases and a higher number of full time equivalent employees of
approximately 39 positions. Salary and employee benefits expense were positively impacted by a decline of $647 thousand in incentives, offset by increases of $448 thousand in pension related expenses, $317 thousand in share-based payment expense,
$152 thousand in 401K match and $98 thousand in deferred salary expense associated with new loan originations.
Occupancy expense increased $178 thousand
for the quarter ended March 31, 2009, reflecting increases in the annual rent of existing locations and rent associated with new office locations totaling $241 thousand, offset by lower occupancy repairs and maintenance of $93 thousand.
Furniture and equipment increased by $475 thousand mainly due to increased depreciation on leased equipment and software utilized to value the
Corporations investment securities.
Merger related expenses were $792 thousand and represent transaction costs such as legal, travel and other
merger related costs associated with the merger with M&T Bank.
Other non-interest expense increased $3.3 million in the first quarter of 2009 compared
to the same period a year ago. The year over year increase is associated with a $1.6 million increase in FDIC insurance costs, $310 thousand in external audit fees, $400 thousand in consulting costs, $209 thousand in other real estate owned costs
and $412 thousand in mastermoney fees mainly related to fraud and $378 thousand in operational losses.
Income Taxes
The Corporation accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards. A valuation allowance is established against deferred tax assets
when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. It is at least reasonably possible that managements judgment about the need for a valuation allowance for deferred taxes
could change in the near term. The valuation allowance was $4.4 million at March 31, 2009 versus $3.8 million at March 31, 2008. The Corporations valuation allowance relates to state net operating losses that are unlikely to be
utilized in the foreseeable future.
In the quarter ended March 31, 2009, the Corporation recorded an income tax benefit of $53.8 million on a pre-tax
loss of $121.0 million, an effective tax benefit rate of 44.4%. In the quarter ended March 31, 2008, the Corporation recorded an income tax benefit of $7.1 million on pre-tax loss of $24.7 million, an effective tax benefit rate of 28.6%. The
change in the effective tax rate for the quarter ended March 31, 2009 was mainly due to the significant declines in year-to-date pre-tax income and the related impact on the effective tax rate.
59
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
For
information regarding market risk at March 31, 2009 see Interest Sensitivity Management and Note 15 to the Consolidated Financial Statements in the Corporations Form 10-K filed with the Securities and Exchange Commission on
March 13, 2009. For the market risk of the Corporation refer to Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations for additional quantitative and qualitative discussions about market
risk at March 31, 2009.
Item 4.
|
Controls and Procedures
|
The Corporations management,
including the Corporations principal executive officer and principal financial officer, have evaluated the effectiveness of the Corporations disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by
this report, the Corporations disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Corporation files or submits under the Exchange Act with the
Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the
Corporations management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Corporations
internal control over financial reporting occurred during the quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Corporations internal control over financial reporting.
PART II OTHER INFORMATION
Item 1.
|
Legal Proceedings
|
The Corporation is involved in various legal
actions that arise in the ordinary course of its business. All active lawsuits entail amounts which management believes to be, individually and in the aggregate, immaterial to the financial condition and the results of operations of the Corporation.
In 2005, a lawsuit captioned
Bednar v. Provident Bank of Maryland
was initiated by a former Bank customer against the Bank in the Circuit Court for
Baltimore City (Maryland) asserting that, upon early payoff, the Banks recapture of home equity loan closing costs initially paid by the Bank on the borrowers behalf constituted a prepayment charge prohibited by state law. The Baltimore
City Circuit Court ruled in the Banks favor, finding that the recapture of loan closing costs was not an unlawful charge, a position consistent with that taken by the State of Maryland Commissioner of Financial Regulation. The plaintiff
appealed to the Court of Special Appeals. The Court of Appeals granted certiorari and reversed, finding that Providents recapture of closing costs is a prepayment charge. The case was remanded to the trial court for further
proceedings. Following the remand, the parties entered into settlement discussions. The parties have recently agreed in principle to a settlement and are in the process of documenting that settlement. The agreed upon settlement for this
individual matter is not material to the Corporations financial statements.
On December 30, 2008, an action captioned
Gilbert
Feldman v. Provident Bankshares Corporation
,
et al
. was filed in the Circuit Court for Baltimore City, Maryland on behalf of a putative class of Provident stockholders against Provident, certain of its current and former directors,
and M&T. The complaint alleges that the Provident director defendants breached their fiduciary duties of loyalty, good faith, due care and disclosure by approving the merger, and that M&T aided and abetted in such breaches of duty. The
complaint seeks, among other things, an order enjoining the defendants from proceeding with or consummating the merger, and other equitable relief. Provident and M&T believe the claims are without merit and intend to defend the lawsuit
vigorously.
In addition to the other information set forth in
this report, the reader should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in the Corporations Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect the
Corporations business, financial condition or future results. The risks described in the Corporations Annual Report on Form 10-K are not the only risks that the Corporation faces. Additional risks and uncertainties not currently known to
the Corporation or that the Corporation currently deem to be immaterial also may have a material adverse effect on the Corporations business, financial condition and/or operating results.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
During
1998, the Corporation initiated a stock repurchase program for its outstanding stock. Under this plan, the Corporation approved the repurchase of specific additional amounts of shares without any specific expiration date. As the Corporation
fulfilled each specified repurchase amount, additional amounts were approved. On June 17, 2005, and on January 17, 2007 the Corporation approved an additional stock repurchase of up to 1.3 million and 1.6 million shares,
respectively. Currently, the maximum number
60
of shares remaining to be purchased under this plan is 740,343. All shares have been repurchased pursuant to the publicly announced plan. The repurchase plan
is currently suspended. The timing of repurchasing shares in the future will depend on the Corporation meeting its targeted capital ratios. No plans expired during the three months ended March 31, 2009. The quarter ended March 31, 2009
reflects no shares repurchased for the quarter.
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number
of Shares
Purchased
|
|
Average
Price Paid
per Share
|
|
Total Number of
Shares Purchased
Under Plan
|
|
Maximum Number
of Shares Remaining
to be Purchased
Under Plan
|
January 1 - January 31
|
|
|
|
$
|
|
|
|
|
740,343
|
February 1 - February 28
|
|
|
|
|
|
|
|
|
740,343
|
March 1 - March 31
|
|
|
|
|
|
|
|
|
740,343
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
|
|
|
|
740,343
|
|
|
|
|
|
|
|
|
|
|
Item 3.
|
Defaults Upon Senior Securities None
|
Item 4.
|
Submission of Matters to a Vote of Security Holders None
|
Item 5.
|
Other Information None
|
The exhibits and financial statements filed as a part of
this report are as follows:
|
|
|
(3.1)
|
|
Articles of Incorporation of Provident Bankshares Corporation (1)
|
|
|
(3.2)
|
|
Articles of Amendment to the Articles of Incorporation of Provident Bankshares Corporation (1)
|
|
|
(3.3)
|
|
Seventh Amended and Restated By-Laws of Provident Bankshares Corporation (2)
|
|
|
(4.1)
|
|
Articles Supplementary to the Articles of Incorporation of Provident Bankshares Corporation. (3)
|
|
|
(4.2)
|
|
Articles Supplementary to the Articles of Incorporation of Provident Bankshares Corporation (4)
|
|
|
(4.3)
|
|
Registrant will furnish, upon request, copies of all instruments defining the rights of holders of long-term debt instruments of the registrant and its consolidated
subsidiaries.
|
|
|
(11.0)
|
|
Statement re: Computation of Per Share Earnings (5)
|
|
|
(31.1)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|
|
|
(31.2)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|
|
|
(32.1)
|
|
Section 1350 Certification of Chief Executive Officer
|
|
|
(32.2)
|
|
Section 1350 Certification of Chief Financial Officer
|
(1)
|
Incorporated by reference from Registrants Registration Statement on Form S-8 (File No. 33-58881) filed with the Commission on July 10, 1998.
|
(2)
|
Incorporated by reference from Registrants Current Report on Form 8-K (File No. 0-16421) filed with the Commission on October 18, 2007.
|
(3)
|
Incorporated by reference from the Registrants Current report on Form 8-K (File No. 0-16421) filed with the Commission on April 11, 2008.
|
(4)
|
Incorporated by reference from Registrants Current Report on Form 8-K (File No. 0-16421) filed with the Commission on November 17, 2008.
|
(5)
|
Included in Note 16 to the Unaudited Condensed Consolidated Financial Statements.
|
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
Principal Executive Officer:
|
|
|
|
May 11, 2009
|
|
By
|
|
/s/ Gary N. Geisel
|
|
|
|
|
Gary N. Geisel
|
|
|
|
|
Chairman of the Board and Chief Executive Officer
|
|
|
|
|
Principal Financial Officer:
|
|
|
|
May 11, 2009
|
|
By
|
|
/s/ Dennis A. Starliper
|
|
|
|
|
Dennis A. Starliper
|
|
|
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
EXHIBIT
|
|
DESCRIPTION
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer
|
62
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